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What's So Great About 401(k) and 403(b) Plans?

If you were to invest $1,000 when you were 25 years old, your investment would grow to be worth $30,912 when you turn 60, assuming a 10% rate of return.  If you waited until you were 50 to make a similar investment, it would only grow to $2,853 by your 60th birthday.  The moral to this example is simple. Start saving for your retirement as early as possible.

It's Up to You

How people save for retirement has changed dramatically over the years.  In years past, many workers counted on their employers to contribute to a pension plan on their behalf.  For many retirees, the combination of a decent pension benefit and a monthly social security check has made for a comfortable retirement.

Those days, unfortunately, are over.  With employees changing jobs more than ever, companies looking to cut costs wherever they can, and social security a big question mark for young professionals, the burden for saving for your retirement now falls squarely on your shoulders.

401(k) and 403(b) Plans

While some companies still offer traditional pension plans, the retirement savings plan offered by your employer is most likely either a 401(k) plan or 403(b) plan.  Named after its corresponding section in the IRS tax code, both these plans provide you with a systematic and tax advantaged way to save for your retirement.  Depending on the type of entity your employer is, you will generally have access to one of these retirement savings plans, not both.  Most companies offer 401(k) plans, while non-profit universities and hospitals offer 403(b) plans.

Here's how these plans work.  As an employee, you're allowed to elect to have a percentage of your salary withheld each pay period.  For 2001, the maximum annual salary deferral is the lesser of 15% of your salary or $10,500, subject to certain other limitations.  You then direct how your salary deferrals will be invested within your own 401(k) or 403(b) account.  Most plans offer a wide variety of quality mutual funds to choose from. 

Two Great Tax Breaks

Participating in these plans provides you with two substantial tax breaks.  First, amounts withheld from your salary reduce your taxable earnings. If you're in the 31% tax bracket, and contribute $10,000 to the 401(k) or 403(b) plan during the year, you'll save $3,100 in federal income taxes that year.  It would only cost you $6,900 in after-tax dollars to have $10,000 invested in mutual funds within your retirement savings account. 

The second tax benefit is that money invested within your 401(k) or 403(b) account grows tax deferred.  While each year you pay taxes on the investment earnings of your non-retirement accounts, no taxes are paid on the earnings of the investments within your retirement savings account until such time that you withdraw money from the plan. 

To illustrate the power of tax-deferred investing over your working years, let's assume that you have the choice of contributing $10,000 to a 401(k) or 403(b) plan each year for 25 years, or you can take the $10,000 as a bonus, pay the applicable taxes, and then invest whatever's left.  If you choose the pre-tax route, your account will grow to be worth more than $1,000,000 after 25 years, assuming a 10% rate of return.  If you choose to pay taxes along the way, your investment portfolio won't even grow to $500,000 over the same period of time.

Matching Contributions

Even though you shoulder much of the burden of saving for your own retirement, many employers do help their employees save for retirement through "matching contributions".  For example, if your employer matches 50% on the first 6% you contribute, they'll add 3% of your salary into your retirement savings account each year, provided you contribute at least 6% of your salary to the plan.  Find out whether your employer offers a matching contribution, and if they do, make sure you're contributing enough into the plan to take full advantage of your employer's match. 

Annual Maximum Contributions Are On The Rise

The Economic Growth and Tax Relief Reconciliation Act of 2001 was passed by Congress on May 26, 2001, and signed into law by President Bush on June 7, 2001. As part of the new law, employee contribution limits to 401(k) and 403(b) plans will increase gradually from the current maximum of $10,500 to $15,000. The limit will be $11,000 in 2002; and will increase by $1,000 each year until it reaches $15,000 in 2006.

Don't Wait

Remember, every week that goes by that you haven't contributed as much as possible to your 401(k) or 403(b) plan at work is a missed opportunity for saving for your retirement. 

Life, Disability and Long-Term Care Insurance

Ask an insurance salesperson how much life and disability insurance you need, and they'll probably tell you, "A lot!"  The problem is, they're usually not very far from the truth.

Very few people are wealthy enough to be without disability insurance and life insurance.  Even if you have some coverage through an employer sponsored plan, you should still evaluate whether you need to purchase additional coverage on your own.

Long-term disability insurance:  Disability insurance protects against lost income in the event you become disabled.  Most people in their working years should have at least a minimum amount of long-term disability insurance.

Life insurance:  Married couples with children, or consisting of only one working spouse, will probably need to purchase life insurance on both spouses.  Married couples consisting of two working spouses with no children, and unmarried individuals with no children and very few debts, may not need life insurance right now.  However, it's usually a good idea to purchase life insurance while you're sure that you're insurable.

How Much Life Insurance Do You Need?

When you're trying to figure out how much life insurance you need, keep in mind that your life insurance provides liquidity to:

  • Pay off your debts, such as mortgages and equity loans, auto loans, student loans, credit cards, and other personal loans.

  • Pay for your final expenses, such as funeral expenses, unpaid medical bills and estate taxes.

  • Set up an emergency fund for your family and/or your business

  • Set aside money that will be earmarked for your children's educations and your surviving spouse's retirement.

  • Provide a nest egg to provide income to the surviving spouse to ensure that your family can maintain its current standard of living.

 While you're looking at your life insurance situation, don't forget to review who you've named as beneficiary on each of your policies.

How Much Disability Insurance Do You Need?

The questions should really be how much disability insurance can you get?  As an incentive for people to get back to work as soon as possible after becoming disabled, most disability income policies will only cover up to 60 to 70 percent of salary. 

What About Long-Term Care Insurance?

Generally, people wait until they are between the age of 50 and 60 before purchasing long-term care insurance.  Most young health care professionals, therefore, are too young to consider purchasing this insurance.

However, have your parents purchased long-term care insurance yet?  Remember, if your parents need to pay for in home care or nursing home care, how long do you think their savings will last? 



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Income Taxes

Saving and Investing



  • 3rd qtr estimates due 9/15/01

  • SIMPLE/IRAs need to be set up by 10/1

  • Good time to meet with insurance specialist to review your life & disability insurance

2000 & 2001 TAX FACTS

  • For 2000, the standard deduction for a single individual is $4,400 and for a married couple is $7,350. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. For 2001, the standard deduction has been increased to $4,550 for a single individual and $7,600 for a married couple.

  • For 2000, the personal exemption is $2,800. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. The personal exemption has been increased to $2,900 for 2001.
  • The maximum earnings subject to social security taxes has been increased to $80,400 in 2001 from $76,200 in 2000.
  • The standard mileage rate has been increased to $.345 per mile as of January 1, 2001 from $.325 per mile during 2000.
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan remains at $10,500 for 2001, and has been increased to $11,000 for 2002.

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