5 Things You Should Do Before Opening a 401(k)


1
Consider an IRA

We already talked about contributing as much to your 401(k) as your employer will match. But what if you don't receive an employer match, you don't like the investment choices offered by your employer, or you're self-employed? You might consider investing in either a traditional or a Roth Independent Retirement Account (IRA).

Traditional IRAs function similarly to 401(k)s, in that you get a tax deduction for your contributions and pay taxes when you begin withdrawing the income. Roth IRAs are a little different: You pay taxes on your contributions, but you don't pay income taxes on the money you withdraw six months after turning 59. This can be beneficial if you're in a lower tax bracket now than when you retire.

The contribution limits are lower for these funds -- in 2012, $5,000 per year if you're under age 50, or $6,000 per year if you're 50 or older [source: Internal Revenue Service]. However, IRAs have several advantages that can make them a good alternative -- or supplement -- to a 401(k) plan. IRAs typically offer a greater range of investment options. You can borrow money from the accounts once every 12 months without paying penalties or interest as long as you replace the full balance within 60 days.

For lots more information on saving for retirement, see the links below.

Related Links

Sources

  • Bischoff, Bill. "Borrowing From Your IRA." SmartMoney.com. (Feb. 16, 2012) http://www.smartmoney.com/taxes/income/borrowing-from-your-ira/
  • Brandon, Emily. "Deciding How Much to Contribute to a 401(k)." USNews.com. Nov. 11, 2011. (Feb. 16, 2012) http://money.usnews.com/money/blogs/planning-to-retire/2011/11/11/deciding-how-much-to-contribute-to-a-401k
  • Chan, Andrew. "Early withdrawals from your IRA can be costly." Boston.com. Nov. 14, 2008. (Feb. 16, 2012) http://www.boston.com/business/personalfinance/managingyourmoney/archives/2008/11/early_withdrawa.html
  • CNN Money. "Guide to Your 401k.'' Nov. 28, 2011. (Feb. 15, 2012) http://money.cnn.com/magazines/moneymag/money101/lesson23/index.htm
  • CNN Money. "Why invest in a 401k?'' Nov. 28, 2011. (Feb. 15, 2012) http://money.cnn.com/magazines/moneymag/money101/lesson23/index2.htm
  • CNN Money. "How to invest in a 401k." Nov. 28, 2011. (Feb. 15, 2012) http://money.cnn.com/magazines/moneymag/money101/lesson23/index3.htm
  • CNN Money. "401k Early withdrawals and loans." Nov. 28, 2011. (Feb. 15, 2012) http://money.cnn.com/magazines/moneymag/money101/lesson23/index4.htm
  • CNN Money. "401k Rollovers." Nov. 28, 2011. (Feb. 15, 2012) http://money.cnn.com/magazines/moneymag/money101/lesson23/index5.htm
  • CNN Money. "Taking 401k distributions." Nov. 28, 2011. (Feb. 15, 2012) http://money.cnn.com/magazines/moneymag/money101/lesson23/index6.htm
  • Fetini, Alyssa. "A Brief History Of: The 401(k)." Time Magazine. Oct. 16, 2008. (Feb. 20, 2012) http://www.time.com/time/magazine/article/0,9171,1851124,00.htm
  • Hulbert, Mark. "The Index Funds Win Again." The New York Times. Feb. 21, 2009. (Feb. 20, 2012) http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html
  • Internal Revenue Service. "2012 IRA Contribution and Deduction Limits." Oct. 20, 2011. (Feb. 20, 2012) http://www.irs.gov/retirement/participant/article/0,,id=188232,00.html
  • Investopedia. "The Lowdown on Index Funds." Oct. 23, 2009. (Feb. 16, 2012) http://www.investopedia.com/articles/basics/03/032803.asp#axzz1mvu9KUz2
  • Lambert, Emily; Randall, David. "How (and why) to open a 401(k)." Forbes.com. May 28, 2010. (Feb. 15, 2012) http://www.forbes.com/2010/05/27/how-start-401k-personal-finance-college-grad-10-retirement.html
  • Lambert, Emily; Randall, David. "How (and why) to open a 401(k)." Forbes.com. May 28, 2010. (Feb. 15, 2012) http://www.forbes.com/2010/05/27/how-start-401k-personal-finance-college-grad-10-retirement.html
  • Lankford, Kimberly. "Diversify Your 401(k) Holdings." Kiplinger's Personal Finance. Nov. 10, 2005. (Feb. 16, 2012) http://www.kiplinger.com/columns/ask/archive/2005/q1110.htm
  • Lewis, Roy. "All About IRAs." The Motley Fool. (Feb. 15, 2012) http://www.fool.com/money/allaboutiras/allaboutiras07.htm
  • The Motley Fool. "60-Second Guide to Maximizing Your 401(k)." (Feb. 15, 2012) http://www.fool.com/60second/401k.htm
  • The Motley Fool. "Step 4: Open and Fund Your Accounts." (Feb. 16, 2012) http://www.fool.com/how-to-invest/thirteen-steps/step-4-open-and-fund-your-accounts.aspx
  • Richards, Brian. "Save Your 401(k) Before It's Too Late." The Motley Fool. Dec. 17, 2008. (Feb. 16, 2012) http://www.fool.com/personal-finance/retirement/2008/12/17/save-your-401k-before-its-too-late.aspx?terms=Save+your+401K&vstest=search_042607_linkdefault&mrr=1
  • Rosevear, John. "Don't Make These 6 Big 401(k) Blunders." The Motley Fool. Dec. 17, 2008. (Feb. 16, 2012) http://www.fool.com/personal-finance/retirement/2008/12/17/dont-make-these-6-big-401k-blunders.aspx
  • Updegrave, Walter. "How much should I contribute to my 401(k)?" CNN Money. Feb. 11, 2010. (Feb. 16, 2012) http://money.cnn.com/2010/02/11/pf/expert/401k_percent.moneymag/index.htm
  • Updegrave, Walter. "Money for life without a 401(k)." CNN Money. July 10, 2007. (Feb. 15, 2012) http://money.cnn.com/2007/07/09/pf/expert/expert.moneymag/index.htm
  • United States Department of Labor. "What You Should Know About Your Retirement Plan." (Feb. 20, 2012) http://www.dol.gov/ebsa/publications/wyskapr.html
  • The Wall Street Journal. "What is a 401(k)?" (Feb. 15, 2012) http://guides.wsj.com/personal-finance/retirement/what-is-a-401k/

UP NEXT

How to Create an Action Plan for a New Job

How to Create an Action Plan for a New Job

How to Create an Action Plan for a New Job


More to Explore