Are 401(k)s Safe?

Today JP from the Internet is hesitant. “I am about to join a 401(k) plan at my new job, Please tell me: 1) How safe is a 401(k) plan? 2) How much interest can you expect?


Well JP,

401k plans tend to be as safe as the funds/insurance that you invest them in. Often, your employer has contracted with a family of funds, like Kemper, Prudential, 20th Century,
Dean Witter, etc. and you may select investments from their menu of options. Sometimes, the options include a life insurance component.

One of the special features of 401k plans is that you manage your own investments. So you are able to move money from one fund, within the family, to another. If the fund does well, your 401k’s value grows quickly, if it loses money, so do you. Naturally, if you’re very conservative, you can put your money into a money market fund and just earn a small rate of interest with no risk of loss.

I suggest that you do a little research before you select your investments.

Two of publications that I often use to help me understand ins-and-outs of the different funds are Kiplingers Personal Finance and Worth Magazine.

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Currently, you may invest up to $14,000 of your wages each year, depending on your salary. Another $4,000 if you’re over 50.

Three more reasons 401ks are often good investments:

1) Your employer will often match all or part of your investment.

2) After a certain period of time, you are permitted to borrow up to 50% of the money you have in the 401k, without tax – penalties. So this is a great, tax free way to save for a down payment on a home.

3) All the money you put into your 401k is before income tax. So, if you put away $500 per month, it only costs you about $350 from your paycheck – because your income taxes are withheld on the wages after they deduct the amount of your contribution. you don’t even have to change your withholding rate. It’s automatic.

Naturally, you’ll find answers to all kinds real estate & tax questions – and lots of tax resources – free, where? Where else? At TaxMama.com !

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