Financial Literacy 2007 - Retirement
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Retirement planning with a 401(k)

9. Scrutinize the 401(k) before you're hired

How many times have you looked for a new job and forgotten to ask about benefits?

That's understandable. After all, most of us are more worried about putting our best foot forward. Salary demands loom large, and we might ask if there's a 401(k). Beyond that? The specifics often get lost in the shuffle, says Scarborough.

"What's the current match? Has the company raised or lowered it in the last few years? What are the investment offerings? Who runs the plan? No one thinks to ask those questions, but they're prudent to ask," says Scarborough. "I've heard of people getting the job and then they think to ask."

To be sure, the last thing you want is a nasty shock of, say, finding out you have to wait a long time before you can start contributing. Ditto for unusually long vesting periods. (On average, 401(k) plans let you vest gradually, over a five-year period, according to the PSCA.) So speak up and find out more. If you're in the enviable position of having more than a single offer, the difference between 401(k) plan benefits may make the difference between a good job and a great one.

10. Cash out wisely as a retiree.

A lifetime of diligent saving and careful planning has reaped big rewards and your 401(k) balance is proof of your hard work. Congratulations.

But your job's not over. Tapping into your money requires navigating rules Kafka would love. Rush to grab cash and you could be making an expensive blunder. Ed Slott, CPA and author of "Your Complete Retirement Planning Road Map" says that between state and federal taxes, estate taxes and mistakes withdrawing money, up to a whopping 70 percent of assets could wind up going to the government. His message: Pay as much attention when withdrawing funds as you did accumulating them.

Generally, you can start taking distributions from your 401(k) without paying a penalty once you're 59½. And you technically don't have to touch the plan until you're 70½.

So, how to get at those funds when the time finally hits? The answer boils down to three basic choices: Roll it over, lump sum or leave it alone.

If you want options, rolling it over into an IRA may prove to be your best choice. After all, you put yourself in control of the assets and can invest that IRA any way you want. Plus, you'll defer taxes until you absolutely have to take the money out, or until that first required distribution hits at age 70½. If you're over 55 but not yet 59, be careful. If you quit, get fired, or leave your job at age 55 or older, you can get 401(k), 403(b) or 457 funds out without paying the 10 percent early withdrawal penalty. That's not true with an IRA. If you fall into that age gap but you think you need the money soon, it might not pay to do a rollover, says Slott.

You also want to be prepared to make decisions about how to invest your savings if you plan to move it to an IRA.

"The drawback is you move to an IRA and leave it in a money market fund or choose some crazy investment," says Harold Evensky, a Certified Financial Planner in Coral Gables, Fla., and author of "Retirement Income Redesigned."

Taking a lump-sum distribution means cashing out completely. Financial pros advise against this for two reasons. First, raiding your 401(k) will mean losing additional opportunities for assets to grow tax-deferred. Second, it's expensive. After all, you'll owe federal and state income taxes on the balance once you cash out. And while there's no getting around taxes on 401(k) withdrawals, "paying taxes sooner than you have to is a bad mistake," says Evensky.

If you like your 401(k) and find its investment choices sufficient, leave it alone. You won't have access to other investments outside the plan, but keeping your assets where they are is the easiest choice.

Finally, bear in mind that you'll probably do best seeking the advice of a financial adviser with experience in retirement planning before you withdraw funds. There may be money that's easier and cheaper to get out of a brokerage account or IRA before touching the 401(k). You've got to look at the big picture, including your ongoing goals and assets. Retirement planning, after all, continues throughout your life, not just while you're saving for it.

Are you worried about having enough money to retire someday? Or, do you have a plan of action? Share your story

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