When does it Make Sense to Participate in a 401k Plan

Saving for retirement can be mentally exhausting. What type of plan is right for you? How about a 401k? It seems like a great option; however, it’s not for everybody.

Explaining the 401k –

The 401k is basically a retirement plan that you can set up when you have a full time job. Not all companies will offer one, so you’ll have to ask your boss about it. To use a 401k, you need to choose between one or more mutual funds. Then you simply place your money in the 401k account, and you’re done.

There are yearly contribution limits, and these limits can change. For 2008, the contribution limits are $15,500. As for matching your contributions to the 401k, your company may or may not choose do so. It’s not a bad deal, but it’s not perfect.

Untouchable Funds –

When you place your money into a 401k, you can’t take it out until you turn 59 without paying a stiff penalty fee. If you decide to withdraw money from your 401k before turning 59 then it’s basically like taking out a loan. There are interest charges and you have to pay the money back eventually. So don’t withdraw from your 401k unless you absolutely have to. Or you may elect to simply not open one at all. It’s up to you.

Only Mutual Funds –

If you know nothing about the stock market then you may very well want to place your money in mutual funds. But if you’re an active investor in the stock market then you may be disappointed in how the 401k is set up. Currently, you can only contribute to mutual funds in a 401k plan.

And there’s nothing wrong with mutual funds if that’s what you want to contribute to. However, some people enjoy picking their own stocks. If you’re one of these individuals then a 401k plan may not be for you.

Uncertain Matching –

Earlier, it was mentioned that your company may or may not match your contributions. Many companies match their 401k plan by fifty percent. This basically means that for every thousand dollars that you contribute to your 401k plan, your company would then place five hundred extra dollars in your account.

So you basically just earned a five hundred dollar bonus by participating in your 401k. But some companies that are doing poorly may not bother with a 401k plan. Or the company may offer one, but they may not match your contributions.

There are many different types of retirement plans that exist today, and the 401k is definitely a good choice for some people; however, it’s not for everybody. If you like mutual funds and want to lock away your money until you turn 59 then a 401k plan is probably for you. Otherwise, don’t bother with one.