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Answers to Your 401k FAQManaging 401k plans can be confusing. We have added this 401k FAQ section to the questions commonly asked of Financial Freedom Seminar leader and expert, Dave Briggs. At Financial Freedom Trail, we are committed to helping you manage your investments such as your 401 retirement plan, but also with all aspects of personal finance and managing your money. We can show you many ways to effective manage your money, save more, reduce debt and to increase your income. Please visit our Home page to see all the things we offer you at no cost. These 401k FAQ have arisen form many of the personal finance seminars and trainings that Dave Briggs does to help people achieved financial freedom. To see all the Financial Freedom FAQ, please
click here. I am currently contributing to my company's 401 retirement plan on a pre-tax basis. I read an article the other day that stated contributing pre-tax money to 401K plans is no longer advisable because when you are ready to retire the percentage of taxes will more than likely be higher than it is now. If that is the case, should I change my position and only do after-tax contributions to my retirement fund? No one knows what tax rates will be when you retire. I still think you are doing the right thing because putting money into your 401 retirement plan on a pre-tax basis allows you to contribute more money (because no taxes are taken out) which means you have a larger base growing for a longer period. In the end, this will yield more money at retirement than paying the taxes now. However, you now have the option of a Roth IRA that will allow your investments to grow tax free, but because you used after-tax money to fund the Roth, you don’t have to pay taxes when you withdraw the money in retirement. You may want to contribute some of your retirement funds to both. 401k FAQ #2: My wife and I are saving a significant amount for retirement through our 401 retirement plans at work. The problem is we just can’t make a dent in the $11,000 we owe on credit cards that we ran up a few years ago. Are we wrong to put so much emphasis on retirement savings? Saving through your 401k plans is an excellent way to prepare for retirement and I strongly encourage it. However, there is a better way in your situation. I suggest you temporarily reduce your 401k plan contributions to the smallest amount you can contribute and still get the full employer matching contribution (assuming these is a match) and take the rest you were contributing and put 100% of that against paying off the credit card debt. As soon as you have the credit card debt eliminated, you can restore the higher 401 retirement plan contributions and even add what you were paying in interest to the credit card company on top of that. 401k FAQ #3: I have outstanding credit card debt and my son is getting ready to go to college, should I withdraw money from my 401k plan to pay down my debt and help pay for his education expenses? Generally, it is best not to “rob” from your 401 retirement plan since that money will be needed for future retirement. I would encourage you to live on a budget that would free up enough money to pay down your debt without pulling money out of your 401k plan and incurring the 10% penalty. With regard to paying for your son’s college expenses, in this case, it may be better to use a portion of your 401 retirement plan than to take on new debt since 401K withdrawals used specifically for higher education can be made without incurring the penalty. (You will still have to pay the taxes.) Then try to make up for the amount withdrawn by contributing additional amounts to your 401 retirement plan to “pay back” the withdrawal as soon as possible. I would also caution against encouraging your son to personally take on significant debt for college, since more and more college graduates are finding their career choices increasing limited due to the pressures to pay off college loans. More and more families are finding lower cost ways to pay for college and avoid debt. Examples include, attending a community college for two years then transferring to a four year school, and spreading four years of college over five or six years to allow periods of work in between to earn money for tuition.
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