Larger 401(k) contribution may be easier than you think

Maximum you can put in will be rising next year

Dollars & Sense

November 16, 2003|By CBS MARKETWATCH

SAN FRANCISCO - Figuring out your 401(k) contribution level is never easy, and at the moment it may be harder still as workers must also cover rising health-plan contributions.

Some employees may be inclined to reduce their retirement-plan deductions to offset competing drains on their paychecks. Instead, they should think about actually boosting or at least maintaining their 401(k) funding level.

Remember, a 10 percent contribution rate doesn't cut your paycheck 10 percent, only by that amount less your federal and state income-tax rate.

Thus, a $500 contribution by an individual in the 28 percent bracket will lead to a payroll deduction of $360, even though $500 will go to the 401(k).

"A lot of folks think, 'I can't afford $500 a month,' but they may be able to afford $400 a month," said Michael Furois, a certified financial planner based in Chesterton, Ind. "The amount they put into the 401(k) will not, dollar-for-dollar, reduce their net pay."

Another benefit to consider: The maximum contribution limits rise next year, to $13,000 from $12,000 now, and to $16,000 from $14,000 for those 50 and older.

Then there's the company match, if you're fortunate enough to receive one. Contributing as much as possible to maximize a company match is a "no-brainer," said Martin Nissenbaum, national director of retirement planning with Ernst & Young. "That's a 50 [percent] to 100 percent return the first minute that you make that contribution," he said.

Some experts suggest 401(k)s offer another useful function: Prospective homeowners may use their plan to save for a down payment, depending on the plan's loan provisions.

While financial experts advise against taking from retirement assets to meet other financial goals, some say those who are avoiding 401(k) contributions to fund other financial goals should reconsider.

"We advise them to use the 401(k), even if they have to withdraw this money later on," said John Nersesian, managing director of wealth management services at Chicago-based Nuveen Investments. "We're trying to encourage the participant who would ordinarily say, `I'm not going to use a K,' to rethink this decision."

Still, Nersesian and others warn against pulling from retirement assets for other goals. Doing that means "you've wiped out a big piece [of retirement savings] that you can never replace again," Nissenbaum said.

Those eligible for a Roth IRA and not receiving an employer match for the 401(k) should consider the Roth first, experts said. In a Roth IRA, the investment grows tax-free, not tax-deferred as in a 401(k).

And when you do start making withdrawals, everything coming out of that Roth will be tax-free.

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