When I was in college, my co-worker once asked me if I was invested in our company’s 401(k).  I mistook him for asking me “if I was okay”.  I responded with, “I’m fuckin’ fantastic”.  That was the first time I was ever introduced to retirement plans.

Here is some information that you should know before you start tackling your retirement.  I wish that I knew this earlier in my life =(

Traditional 401(k)s and 403(b)s are both employee sponsored retirement plans; the former offered by for-profit organizations and the latter offered by non-profits.  These accounts are setup so you can take a percentage of your compensation on a tax-deferred basis to a retirement program. If you’re lucky, your employer may even fully or partially match your contribution (Company Match).  For almost 3 years, I had the opportunity to contribute to such an account with 4% of my paycheck being matched dollar-for-dollar.  Did I take advantage of it? NOPE.  I wanted my money, and I wanted it NOW!  One of my biggest financial mistakes.

Some features to 401(k)s and 403(b)s (SOURCE)

• You don’t have to pay taxes until you take the money out!
• Many companies match your contributions to a specific percentage.
• Max contribution limit is $15,500 for 2008 and $16,500 for 2009.  The limit is subject to cost-of-living increases after 2009.  (SOURCE)
• You can’t take the money out until you’re 59 1/2. If you do happen to do so, you are penalized 10% of the amount taken plus income tax.  See the exceptions at the IRS website.

I want to contribute to my company’s retirement plan, but I have credit card debt.  What should I do?

SCENARIO 1: If the company does not match your contribution and the annual rate of return to your 401k is less than the interest rate charged by your credit card company

Then you need to stop contributing to your 401k and pay off all that debt.  Once the debt is completely paid off, then begin the contributions to max deposit

SCENARIO 2: If your company does match but the annual rate of return on your 401k is less than the interest rate charged by your credit card debt

Then contribute to the max match level.  Any excess funds should be allocated towards paying off the credit card asap.

SCENARIO 3: If your company does match but the annual rate of return on your 401k is more than the interest rate charged by your credit card debt

Then you’re in a good position. Contribute what you can to the 401k until fully maxed out for the year. Any extra funds can then go towards the credit card debt at your own pace.  Ideally it’s good to have no credit card debt, but that’s up to you to decide.

Do you currently contribute or plan to contribute to your company’s 401k or 403b? Are you using another form of saving for retirement? Post your response to the comments and keep an eye open for my future post about Roth 401(k)s.

Photo Credit: Jason Krodinger

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