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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Monday, May 29, 2006

401k Investment Strategies

Rule #1 of investing in a 401k is to invest at least up to the level your company matches because it is free money. So if your company matches dollar for dollar up to a 5% contribution and you contribute that 5% of your salary (e.g. 5% of 100,000=$5,000). In that example you would have an extra $5,000 in your 401k at that company.

  1. Your company might not vest 100% of that matched funds to you right away. They might have a schedule of tenure you must hit before you can be the outright owner of the money the company matched.
  2. Your company might provide stock as a match. Be careful: you must diversify your portfolio or you could be another victim of an Enron situation where many employees had all of their 401k investment in Enron stock and lost their retirement money as the stock price plunged.

After you have hit the company match level and you want to put more towards retirement you should take the excess and open a Roth IRA. Here you will have endless choices of what to invest your money in and it will be after-tax investments with the ability to withdrawal contributions (not profits) tax-free at any time.


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