Before you get excited that your company offers a 401(k) program, check out if they offer corporate matching. This is the biggest perk: It’s a corporate incentive to invest. Always max out corporate matching. Duh, it’s free money!
First question you’ll need to answer (or you may be advised without your input): Do you want to take out the tax payment now – and invest less? Or would you like to defer the taxes until you retire? Here are some considerations:
Do you think the interest gained will outweigh the inevitable increase in your tax bracket (percentage)? Investing pre-tax gives you more “free money”–corporate matching and market value increase. If you invest after-tax, you prevent having to pay the inevitably higher taxes when you retire. Weigh the odds.
Your second decision will be about your investment mix. In which ‘financial vehicles’ should you put your money? While you can’t invest your 401(k) investments into an insurance vehicle, you may like to consider the options. Most likely, the financial management firm offers a variety of insurances that work like investments. We’ll talk about this in another article.
Corporations used to appoint trustees who managed the portfolios on behalf of their employees. This has become highly controversial; most now offer “participant-directed” 401(k) plans. Likewise, corporations used to rally their employees to invest into their own stock. Since Enron, this too has become controversial.
Basically, you now have full control to invest your money into stocks, mutual funds, commodities, and bonds in the mix you want. You should leverage the expertise of a counselor: your accountant, financial planner or even your family can help.
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