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401(K) Plans And Your Financial Freedom

April 17, 2012 | Comments: 0 | Views: 177

The 401(k) savings program, so named for the I.R.S. tax code that allows for it, is a retirement account set up by many companies. While participation is optional, you should understand how important it is to contribute to your 401(k) plan if you expect to achieve financial freedom! Many company plans offer some type of matching funds for your contribution. You need to check your particular plan. If they do offer a match of any type, you want to take full advantage of this "match" as it is free money. A typical scenario might be a 50% match up to a certain dollar limit such as $2,500.00 per year. Under this scenario, the first $5,000.00 of your annual contribution would be matched with $2,500.00 from your employer. You definitely want to capture this FREE MONEY as it will bring you to a state of financial freedom that much sooner. If your means allow, you can contribute up to $16,500.00 for 2012, so be sure to max that out if you can.

Once the account is funded, you will be given a choice of securities to invest in. This usually is in the form of mutual funds. Sometimes, you can also pick your own company stock if it is available. Just use common sense when diversifying across these different offerings. Remember to not put all your eggs in one basket. Not too long ago you might have read about the energy company Enron. Some of the employees had invested all of their 401(k) money into company stock. The company went bankrupt so you can just imagine what happened to the value of their 401(k) account. Be wise and diversify.

If you are just starting out in the investment world, you will have a long time horizon. In other words, you will not need to make withdrawals from your 401(k) account any time soon. That being the case, you should consider picking mutual funds that are of the growth style with an aggressive outlook as these should outperform the other offerings available to choose from inside your 401(k) account. As you get closer to retirement, you will want to adjust your choices to be less aggressive and more moderate. At this time you will want to increase your bond exposure and decrease your stock exposure as you will have less time to recover any losses in the case of a market downturn.

Please note that even if your company does not offer a 'match' of any type you should still consider participation in the 401(k) plan as this allows for you to accumulate tax-deferred growth of your money. Furthermore the limits on your contributions towards this tax-deferred growth are much higher than you could capture elsewhere... $16,500.00 per year versus $5,000.00 per year inside an IRA. Your financial freedom will ultimately be dependent upon your ability to contribute regularly and over many years, so do not delay!

Chris Borg is a practicing pharmacist and financial adviser who writes about health care and investing. Chris's latest website on financial freedom is at RatraceBgone, where Chris provides financial tips such as the 9 steps to financial freedom: 9 Steps To Financial Freedom

Source: EzineArticles
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