| Q: My wife's 401(k) was devastated when the | | | | 1. Forgoing a Company Match. If your employer |
| New Jersey technology company she worked for | | | | matches your contributions $0.25 on the $1 up to |
| hit hard times. Now, I am worried about the | | | | 6%, contribute at least 6% and earn a |
| 401(k) offered by the New Jersey pharmaceutical | | | | guaranteed 25% return. Better yet, defer a larger |
| company I work for. What are the common | | | | percentage and earn additional tax benefits |
| mistakes people make in their 401(k)'s and how | | | | throughout your career and thereafter. |
| can we avoid them? | | | | 2. Withdrawing From 401(k) Before Retirement. |
| The Problem - Mistakes Made in 401(k) Plans. | | | | Money taken out before the age of 59 ½ |
| Many companies are eliminating or are simply not | | | | is a accessed a 10% tax penalty and is taxed at |
| offering traditional pension plans. Instead, they are | | | | the current tax rate (which is often higher than in |
| shifting the responsibility of a retirement nest egg | | | | retirement). Some 401(k) plans allow employees |
| to the employees. Most employees are not skilled | | | | to borrow against their own balance, paying |
| in managing one of their largest assets, their | | | | themselves back plus interest. Think of your |
| 401(k) account, and make costly mistakes. | | | | 401(k) assets as your absolute last resort when |
| The Solution - 401(k). Just a quick background on | | | | you hit a financial jam. |
| 401(k) and how it works. Employers offer their | | | | 3. Investing Too Conservatively. Just because this |
| employees 401(k) retirement plans so their | | | | is retirement money does not mean the portfolio |
| employees can contribute a portion of their own | | | | should be invested too conservative. To the |
| compensation towards their own retirement. As | | | | contrary, the longer your time horizon the more |
| an incentive, some employers provide free | | | | risk you should tolerate. |
| matching of employee contributions. Other | | | | 4. Over Investing in Company Stock. New Jersey |
| employers match and make outright contributions | | | | is home to some of the largest pharmaceutical |
| through profit sharing programs. Unlike traditional | | | | companies in the world, which employ tens of |
| pension plans, where employers are required to | | | | thousands of New Jersey residents. Many |
| contribute to the employees' retirement accounts, | | | | employees want to show their pride by allocating |
| many 401(k) plans require no contribution by the | | | | 25%, sometimes 75% of their 401(k) to their |
| employer. | | | | company stock. Think twice before making this |
| A traditional 401(k) allows employees to make | | | | mistake. If the company hits difficult times the |
| pre-tax contributions through salary deferral. | | | | stock and your 401(k) can plummet, even if the |
| Contributions, interest, gains, dividends and the like | | | | overall financial markets soar. Simultaneously, if |
| are all sheltered from taxation until the assets are | | | | the company is having difficulties your job could |
| withdrawn. Employee contributions directly reduce | | | | be at risk. A good rule of thumb is to limit |
| federal income taxes. For example, an employee | | | | company stock to 10% of your portfolio. |
| who earns $100,000 and contributes $20,500 to | | | | 5. Over Investing in One Industry. It was only five |
| their 401(k) only pays federal income taxes on | | | | years ago when you heard family, friends and |
| $79,500 of income that year. | | | | colleagues saying, "you can't lose money investing |
| Withdrawals are taxed as income in the year | | | | in technology stocks". We all know how that story |
| they are taken at that year's tax rate. Imagine a | | | | ended - badly. Not only were there massive |
| 20 year-old employee not paying taxes on | | | | layoffs throughout New Jersey, but many |
| contributions and gains for 50 years; then being | | | | companies were just shutting their doors. Many |
| taxed only on the amount withdrawn. How often | | | | employees already had technology exposure in |
| do you have the opportunity to legally avoid | | | | their 401(k), yet increased the exposure even |
| paying income taxes, penalty and interest free, | | | | further by allocating money towards technology |
| for 50 years? The employee contribution limit per | | | | stocks and/or funds. The end result was doubling |
| year is $15,500 for those under the age of 50 | | | | or even tripling their losses. Avoid over-exposure |
| and $20,500 for those 50 years of age or over. | | | | in any one industry - particularly the one your job |
| Common Mistakes New Jersey Employees Make. | | | | depends upon. |