A 401(k) plan allows you to set money aside out of every paycheck to fund your retirement. But your retirement plan choices do not end there. You can also contribute to a Roth IRA, a plan that allows you to withdraw your accumulated funds tax-free in retirement. Contributing to both a 401(k) and a Roth IRA gives you a good mixture of retirement funds and helps you build your retirement nest egg that much faster.
Items you will need
- 401(k) enrollment form
- Roth IRA application
Call the human resources department at the company you work for and ask for an enrollment form for the company's 401(k) plan. The enrollment form is often available online via the company's Intranet. For the tax year 2010 you can contribute up to $16,500 to your 401(k) plan, plus another $5,500 if you are age 50 or older.
Complete the enrollment form and submit it to your company for processing. Indicate what percentage of your pay you want to dedicate to the plan, but try to put in at least enough to get the full company match. If you earn $30,000 a year and your employer contributes 50 cents for every dollar up to the first 6 percent of your salary, that equates to a $900 savings bonus. Companies use the employer match to encourage their workers to participate in the 401(k). When the employer matches a portion of the worker's contribution, that employee can build a bigger nest egg.
Watch your paycheck to see when the 401(k) contributions kick in. You will notice a reduction in your net pay, but probably not as much as you were expecting. That is because the money in the 401(k) comes out pre-tax, which lowers the amount of federal income tax you pay.
Contact the mutual fund companies you do business with and ask for information about their Roth IRA plans. If you do not have any mutual funds, you can start by contacting low cost firms to minimize the fees to manage the funds.
Review the materials carefully to determine which funds have the best performance and the lowest costs. This information is contained in the prospectus the firms sent you. Make sure you can meet the minimum initial investment if you are just starting out, and watch out for maintenance fees that might apply to low balance accounts.
Submit the application, along with your annual Roth IRA contribution, to the address listed on the form. If you prefer, you can set up automatic monthly transfers from your bank account to the Roth IRA. Make sure you do not exceed the maximum contribution limit, or you could owe taxes on that money until it is withdrawn. For 2010, you can contribute $5,000 to a Roth IRA, plus an extra $1,000 if you are age 50 or older. This $5,000 or $6,000 contribution limit is on top of the $16,500 to $22,000 you can contribute to your 401(k) plan. So between the 401(k) and the Roth IRA you could set aside up to $28,000 per year for your retirement.
- Keep copies of all your 401(k) and Roth IRA statements with your tax records. You will need this documentation when you do your taxes, and when you start withdrawing the money in retirement.
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