Being Smart About Your 401K Plan

• You can convert your 401K plan into an IRA, then use it as a down payment on your house up to 10K per person.  This transaction is penalty free and is a great way to save for a down payment on your first home!  If your company helps to contribute, you can basically use their money for your down payment when you leave.
• All money put into the 401K is tax free, you only pay taxes on it after you retire and start withdrawing
• You avoid all the local city and state taxes, so if you save your 401K money in New York City and then move to Washington State., you avoid paying the high city and state tax rates altogether.
• Your money grows tax-deferred, meaning when you make money from stocks or other investments and you don't have to  pay any tax on it.  You use the government's money to invest for your retirement instead of giving it to them.
• In an emergency, the government allows you to withdraw funds, however if you withdraw prior to age 59.5 you have to pay an extra 10% tax penalty.
• You can contribute up to $13,000 for 2004.
• If you leave your job, you can always convert your 401K to an IRA and buy and sell any stock or mutual fund with it.
• Most employers contribute money to your 401k plan as a company benefit, another big reason to take advantage of  401k pre-tax deductions

How much should I contribute?

This depends on your personal finances, however you should always try and maximize your 401k.  The reasons for this are that most companies are giving you money in addition to your contributions and also the huge tax savings that occur especially if you live in a high tax state and city.  We recommend contributing as much as you can while you are young so that you don't have to contribute that much when you get older since you have the power of interest compounding.

Buy a house with your 401K plan than has been converted to an IRA

What most people don't realize is that if you stash away $10,000 in your 401k, then leave your job and convert it to an IRA, you can then withdraw the money as a down payment for your first house.  This of course is not a good reason to leave your job, but since most people change jobs frequently these days its good to know that you can use the money if you have to before you turn 591/2.  The advantage of doing this is that when you buy a house you usually have high deductions from the mortgage payments from the first year, so you tax rate is less than when you were just working and saving your money.  It also makes it easier to save since the money is pulled from your paycheck automatically and your employer might have even contributed to 401K plan.

Where should I invest my Money?

You can see our EFT page for some suggestions if you have a plan that allows you to chose whatever you want.  However, most plans only have a small amount of options available to choose from.  We recommend going for the S&P 500 fund and forgetting about it.  However, if you would like to get more aggressive, you might want to split your money with the S&P fund with an international fund since it looks like most future growth will come from countries like China and India vs. the US.  Whatever you do, make sure you become more conservative as you get older so you don't risk too much of your future when you don't have much time left.