Getting the Most from Your 401(k) or 403(b) Plan

Count yourself lucky if you are among the 38 million Americans with access to a 401(k) or 403(b) retirement plan. These retirement plans are often an efficient and relatively painless way to build a retirement nest egg.

We can't tell you what value the market will put on your investments at retirement; however we can share some tips on improving the potential performance of your assets.

Matching Contributions

If your employer matches some part of your contribution, consider jumping on this benefit with both feet. For example, your employer may match 5 percent of your salary contributed to the plan. The key is that some plans may require you to reach the 5 percent contribution level before the company matches. If you only contribute 4.9 percent of your annual salary, there may be no matching dollars.

A matching contribution can mean an instant 100 percent return on that money if your employer matches dollar for dollar. If 5 percent of your annual salary is $2,400, your employer would kick in $2,400 matching dollars for a total of $4,800. You can't beat that deal.

Not all employers match funds, and not all match 100 percent. See your plan administrator for details. Regardless of the percentage, if your employer matches any part of your contribution, take advantage of this windfall.

Watch Your Asset Allocation

Most employers offer several choices for 401(k) and 403(b) investments. Be sure you understand the benefits and risks of asset allocation. Many people got burned by putting too many dollars in the Internet/tech sector in the late 1990s or, more recently, in their own company's stock. Likewise, many people have invested so conservatively that their investments have barely kept pace with inflation, failing to grow.

You should spread investments over stocks, bonds, and cash. Asset allocation is the process of determining the percentage of each.

Resist Borrowing From Your Account

Many 401(k) and 403(b) plans allow you to borrow money from your account. On the surface, this may seem like a good idea. After all, when you pay it back the interest goes to you, not a bank.

However, there are some real problems in borrowing from your account. You end up paying taxes twice on the same dollars, for one thing.

The money you put into the plan is pre-tax. When you withdraw it from the plan at retirement, you pay tax on your contributions and earnings for the first time. When you repay a loan from a retirement account, you pay with after-tax dollars. At retirement, you will pay taxes again on the money you used to repay the loan.

That's not all the bad news. The money you borrowed is not invested, meaning it isn't growing.

There may be circumstances when you need access to the money, but be sure you understand the costs involved.

Don't Worry About Taxes

The money you put in your 401(k) or 403(b) plan grows in a tax-deferred environment. This means you can be aggressive with growth investments and not worry about capital gains taxes. However, it doesn't mean you should ignore asset allocation principles.

If aggressive investments fit your investing needs, a retirement plan could be a great place to house those assets that normally might generate annual tax bills. When you begin receiving distributions at retirement from the plan, you will pay normal income tax at your then marginal rate.

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