Thursday, August 20, 2009

Moving $$

Before getting to today's topic, for all you Costco fans out there, here is a contest you can enter to win one of three Costco cash cards: $100, $50 or $25. All you have to do is list your five favorite products that you buy at Costco, along with the brand and briefly say what what makes each one great. The three winners will be chosen at random from all of the responses. As of now, there's less than 60 entrants so your chances of winning something are not too shabby! The contest closes at midnight CST on August 26, so head on over and list your fave five!

I thought it was rather funny that normally there are hardly any comments on the site but for this post announcing the contest, suddenly everyone came out of the woodwork!

To see the contest details and enter, click here.

As for today's topic, this may be of interest to those of you who have 401k plans.

In my little opinion, I think 401k plans are great. You get to invest pretax dollars (i.e., you don't get taxed on what you contribute) into a plan whose earnings also accumulate without being taxed. You are taxed only when you start taking your money out of the plan which is usually not until retirement. That gives your account a long time to earn and do so tax-free.

On top of that, many 401k plans have employer matching contributions as well, making your return on your investment even greater.

I think it is to everyone's advantage to put as much as possible into it. The limit for 2009 is $16,500. If you are over 50 (like me, sigh..) you can contribute an additional $5,500 "catchup" amount, too.

Now if you are like me, it is difficult to withhold the maximum amount from the paycheck because after all, you need something to pay the bills! From what I've seen, most people contribute far less than the maximum amount.

What if you have money in savings accounts, though? Would you like to move those into a 401k? Savings accounts are earning about .000001% these days. If you have some excess savings that you feel you can put away for retirement, why not move it to the 401k?

Maybe this is obvious or stupid or whatever, but to transfer your regular savings that is earning practically nothing these days into your 401k, just increase your 401k deduction from your paycheck. Then whatever the shortfall happens to be because you are putting more money into your 401k and getting less net from your check, take that amount out of your savings account.

What does that accomplish? In substance it moves money from a taxed, low earning account into a 401k account that is not taxed and presumably offers a higher return on your invested funds. Plus if your employer does 401k matching, that is more money in your 401k that will be matched. On top of that, you get the tax savings from putting your pretax earnings into your 401k account.

If you understood all that, then you might have this issue to raise: the money in your low interest savings account is FDIC insured and you are guaranteed not to lose anything. Money in your 401k is not insured. What if the 401k account goes down?

That is a risk, of course. But think of it this way: you saved maybe 30% or more of your money from taxes by putting it into your 401k. Plus your employer might match some of this. So in effect, your 401k account would have to go down by 30% or more before you got to the same point you would be had you not increased your deduction. In other words, you wouldn't be worse off by transferring your money into a 401k until those funds lost 30% or more of their value. How likely is that to happen? Meanwhile, your money would have gone to Uncle Sam for taxes and then you'd have no chance at all to earn anything on it!

The whole exercise above was designed to get your money into something that earns more plus reduces how much you pay in taxes. Think about it - combined federal and state income taxes that you pay are a BIG chunk of your money. Why do it if you can legally avoid it?

Maybe you don't notice because taxes are taken out before you get your check. But if they weren't and you actually had to write a check each pay period for the taxes you owe, you'd be feeling the pain, I bet! Instead, why not have 401k money taken out before you get your check? You won't notice that, either but it will be money you can keep instead of money going to bail out the banks and car companies that squandered all their money and now want yours to boot.

If the above makes sense, that's good. If it doesn't, well, I apologize for not being clearer or making it confusing (or else you're a dunce, haha).


Anonymous said...

Great post on the 401K. I've put in the max amount into a similar plan, the 403b for the last 22 years. There are times when its not good for the blood pressure. I've learned to just not look. Coming home from work and discovering that I lost $30k that day is not good. Last year we lost more than our combined earned income. That on top of home equity reductions makes for a need for beta blockers. This is a great time to jump in though. Stocks are going up and if you are really brave, its possible to "park" the money in interest only accounts or to speculate in low caps/hi yields.

Rickie Miyake said...

Yup, buy and hold took a beating, didn't it? Things are climbing back up and while I think stocks are still cheap, you never really know. I just laugh when I see what DTG is selling for now.. it kind of leveled off but still, from 60 cents up to the low 20 dollar range in 5 months is crazy.