401(k) plans are a wonderful investment. However, in order
to make the most of them, you really need to understand a few things about how
to manage them.
To begin with, you should know that just because you leave your
job doesn’t mean your 401(k) is over and done with. That’s a common
misconception. You can always transfer your 401(k) to an individual retirement
account (IRA) when you leave your current place of employment. That’s known as
a “rollover,” and, best of all, it comes without taxes or penalties. You can
even take several 401(k) plans from past jobs and consolidate them into a
single IRA for convenience and maximum profit.
Secondly, you should know whether or not your 401(k) comes
with a stable value fund option. If it does, then it’s probably a very good
idea to take advantage of this investment opportunity. Stable value funds come
with good interest rates, which are usually higher than those offered by a
bank, and as the “stable” part of their name implies, they don’t fluctuate. In
other words, they’re a source of safe money! Set aside as much as you’ll need
for the first year or so of retirement; that way, you’ll have it there just in
case.
Another thing that’s important to understand is that you
really shouldn’t be touching your 401(k) for anything except retirement. The
money within it is a fully protected asset, which means that creditors can’t
touch it no matter what. Since you don’t know what will happen in the future-
you could lose your home to foreclosure and not have that asset or be forced
into bankruptcy- it’s good to have money that you know will always be there, no
matter what, and that can see you through retirement.
Also keep in mind that if your 401(k) offers a stock
ownership plan for employees, it can be smart to buy up at least some of that
stock. If you do end up owning a lot of company stock, however, understand that
you may be subject to the net unrealized appreciation tax rule. What this means
is that, when you retire, you’ll be able to distribute the company stock that
you hold and then only have to pay income tax on the stock and its cost basis.
You’ll also be able to pay taxes on your gain when you sell the stock back, but
the taxes you pay will be at a special, lowered rate. To determine if this tax
law will apply to you, and if so, how to get the most benefit from it, working
with a financial advisor is smart.
As you can see, 401(k) plans are complex, but when you know the ins and outs of them, they can be a lot easier to understand and deal with. If you have other questions about your 401(k) or about 401(k) plans in general, you can always talk to a financial consultant.
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