Vesting refers simply to the non-forfeitable percentage of your accounts assets. In other words, whatever you contribute to your 401(k) plan is always yours to keep including any rollover money.

If your employer contributes to your plan, a vesting schedule for the employers contribution is part of the plan. This schedule ties in a non-forfeitable percentage to the employers contribution for each year of service until you are fully vested 100% in the employer contribution.

Vesting schedules vary with the employer. A sample schedule could include you being fully vested after three years of service. After year one the schedule may have you one third vested; after year two you could be two thirds invested; finally upon your third anniversary you would have full entitlement to your employers contributions, thus you would be 100% vested.

In all cases, upon leaving a company your contribution and any rollover funds are yours to keep. However, depending on your employers vesting schedule only a percentage of the funds contributed by your employer may actually be yours to keep. If you leave before you are fully vested, you stand to lose a significant amount of money. Thus, it behooves you to calculate whether the financial benefits of the new job outweigh any potential loss of employer contributions to your 401(k) account.

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I would like to take this opportunity to encourage you to seek the guidance and advice of a professional financial planner. The resources and knowledge that a competent financial advisor can share with you will be invaluable when it becomes time to make the decision that will affect how your retirement savings are put to work for your retirement. We go to a mechanic for mechanical advice (at least I do) so it only makes sense that we would go someone who has trained in financial matters for financial advice.

Getting back to business, when it comes to financial retirement planning you should find that both IRAs and 401 (k) plans have strengths and weaknesses. There are also limitations as to how beneficial they can be when used in combination with one another as well as their own limitations. Every benefit that aids you in taxes and retirement should be considered carefully before leaping.

Let’s first look at the 401 (k) plan. This is a plan that offers a few benefits that are much preferable to many over other retirement plans. The first thing you might want to consider is that you can invest up to 15% of your salary or a maximum of $15,000 per year (as of 2006). Of course that is assuming that your employer doesn’t have limits on how much you can invest. The money invested in your 401 (k) account is pre tax money so it lowers the amount of taxes you are paying out of each paycheck. Many people also find that because the money is taken from their checks before it arrives it is far less painless to part with. As someone who has closely watched taxes, FICA, and Fido get my money for years I can say that it is no less painful for me but some find it comforting and that is a real benefit. Finally and perhaps the most important thing to consider is that many employers will match a percentage of your contribution up to a certain amount each check. As an employee this is a boost to your investment that is well deserved and hard earned. I hope you appreciate the implications it has on your future earnings. You should keep in mind that the penalties for accessing these funds early are harsh indeed in order to discourage this practice from occurring. Take care that you do not over-invest in these funds to the point that you will need to access them in times other than dire emergencies.

IRAs are another creature all together. You will find much stricter limitations on IRAs than on 401 (k) plans beginning with the fact that if your employer offers a 401 (k) you must make very little money in order to qualify for the tax deductions that this particular retirement fund generally allows. The maximum yearly contribution for your IRA will be $4,000 or 100% of your annual income; whichever is greater up until the age of 49. Once you’ve reached the age of 50 you can invest an additional $1,000 to your fund. The other major drawback when it comes to an IRA is the fact that you must begin receiving payments at the age of 70.5 from your account. You will also be heavily penalized if you make an early withdrawal from these funds.

Whether you choose a 401 (k) plan, a Traditional IRA, or both for your financial retirement investments, I hope you will take the time to discuss the benefits and disadvantages of each with your financial advisor before making your final decision.

PPPPP

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The first and perhaps largest mistakes that people make when it comes to 401 (k) plans is not signing up. Yes you heard that right. What people do not understand is that this is something your employer offers so that you can have some security for your future. It is a manner of saving money for your future that shouldn’t be overlooked or taken for granted. Even a bad 401 (k) plan is better than no 401 (k) and with strict regulations those are few and far between. More importantly, if your company offers to match the funds in your 401 (k) plan not taking them up on that offer is literally tossing money in the garbage can.

The next big mistake when it comes to your 401 (k) is risking too little. Rewards come with risk. If you aren’t taking any risks with your investment then you are by and large throwing money down the drain. In addition to that, it is nearly impossible to meet your retirement goals without taking some risks, and some hits along the way. This doesn’t mean you should be reckless but along the way you are going to need to take some calculated risks in order to receive the bigger payouts that most of us hope for when investing in their retirement funds.

Risking too much. There are many risks involved when investing in the stock market. There are a few that deserve a little more mention than others. First of all, stocks present a fairly large risk, particularly to the uninitiated. While it is true that great rewards are most often the product of great risks you do not want to risk the bulk of your retirement by investing it all in stocks. Another thing you want to avoid doing if at all possible is investing in your company stock. We’ve seen too many lives destroyed when companies go under taking the financial stability of their employees along with them. Many companies offer incentives to employees for investing in their stock, which may be tempting but I recommend investing as little as possible in your company stock whenever possible as this could lead to problems down the road.

Finally, the worst thing you can do for the health of your 401 (k) is borrow against it. There are so many ways in which this could go wrong and the penalties for this are more than a little prohibitive. They are designed to be that way so that you will use the funds for their intended purpose. If you absolutely have no other option is the only way I would recommend borrowing against your 401 (k) and I would seriously consider selling a kidney before doing that.

When it comes to your financial retirement, 401 (k) mistakes can be far more costly than you may realize. Work to avoid these common mistakes and you should be well on your way to a successful retirement.

PPPPP

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