Plans Still a Top Saving Option
The fact that government-mandated 401(k) plan reform appears to be stalled shouldn’t discourage workers from contributing to these plans--and contributing as much as possible, experts said.
Though the system may not be perfect, financial advisors maintain that 401(k) plans remain one of the best options workers have when it comes to saving for retirement. And this year, new rules allow employees to contribute even more to these programs.
For the record:
12:00 a.m. April 11, 2002 FOR THE RECORD
Los Angeles Times Thursday April 11, 2002 Home Edition Main News Part A Page 2 A2 Desk 2 inches; 40 words Type of Material: Correction
401(k) contributions--A story in Monday’s Investing section noted that a new federal law allows higher contributions to 401(k) accounts. However, some California employers don’t permit workers to make the higher contributions because they aren’t yet authorized under state law.
In 2002, workers can contribute up to $11,000 to a 401(k). Those ages 50 or older can contribute an extra $1,000 in so-called catch-up contributions.
Plan contributions are taken out of paychecks before federal income taxes are computed. That reduces the amount of a worker’s income that is subject to federal tax each year.
In addition, many individuals who contribute to 401(k)s can take advantage of income-contingent tax breaks that they otherwise might have lost because they earned too much.
For example, there’s a special tax credit for paying education expenses for a college freshman or sophomore. But the break begins to phase out once a taxpayer’s income exceeds $41,000 for a single person or $82,000 for a married couple filing jointly.
If a couple earning $92,000 were paying these college expenses, contributing $10,000 to a 401(k) plan would not only save them $3,000 in income tax, it would reduce their taxable income enough to qualify them for the full $1,500 Hope Tax Credit--half of which they otherwise would have lost because their income exceeded the thresholds. The net tax benefit to contributing to the 401(k) would be $3,750.
Many companies also match employee savings up to set amounts. For example, a firm might match 50% of the first 6% of pay contributed by a worker.
At the least, experts say, workers should contribute enough to a 401(k) account to qualify them for the full employer match, while also making sure that they are keeping their plan assets well-diversified.
But perhaps the biggest benefit of 401(k) plans is that they are automatic: Contributions come out of earnings just like payroll taxes, reducing the temptation to spend rather than save.
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Kathy M. Kristof
