401 contribution limitAs you look around what do you see?  The economy has bottomed out, your 401k account statements are showing negative returns, you can’t seem to get ahead, the cost of everything you buy keeps going up not down.  We are in tough times.

So you keep asking yourself why in these turbulent times are you still investing money into your 401k’s?  And why do you keep your 401k account open?

There are many good reasons to keep investing into your 401k’s: the tax advantages, the free money, the 401k contribution limits, the tax-free 401k loan capabilities and the tax-free 401k withdrawal options.

Let’s review the 401k investment benefits which do outweigh the negatives, even in tough times.

Taxes:

  • You can save on taxes.
  • 401k investments can lower your taxable income for the year.
  • Sometimes you can use the monies in your 401k plan on a tax-free basis.
  • Check with your accountant and 401k plan administrator.

Free money:

  • You can get FREE money.
  • If your employer matches your 401k investments, you are receiving FREE money.

401k Contribution Limits vs IRA contribution limits:

  • The 401k contribution limit is greater than the IRA contribution limit.
  • For 2010 the 401k contribution limit is $16,500.
  • And for 2010, the 401k catch-up contribution limit is $5,000 if you are over the age of 50.
  • The IRA contribution limit for 2010 is $5,000 with a $1,000 catch-up contribution.

401k Withdrawal Capabilities:

  • In a financial emergency, you can make a 401k withdraw
  • There are 4 reasons you can withdraw from your 401k.
  • To prevent severe financial hardship, to pay medical bills, 1st time home buyer, to pay for higher education
  • You cannot take a withdrawal from an IRA without taxation and incurring tax penalties.

401k Loan Capabilities:

  • In a financial crisis, you can also take a 401k loan.
  • Under the right circumstances, penalty-free.
  • Not all 401k plans offer the 401k loan option.
  • You will have to check with your employer on loan capabilities.
  • 401k loan interest rates are generally quite low.
  • You cannot take a loan against your IRA balance.

Everyone’s financial situation is unique.   You need good guidance in tough times.   You need the facts so that you can make good financial decisions on what works best for you.

Talk with your 401k plan adviser about your best 401k investment options.  And talk with your 401k plan administrator about the 401k contribution limits and 401k loan capabilities of your plan.