A column on personal finance prepared by the Virginia Society of Certified Public Accountants


(May 27, 2003) – As more Americans recognize the need to take responsibility for their retirement, they are increasingly turning to employer-sponsored 401(k) retirement plans. These plans are one of the best ways to save for retirement. To help you make the most of your 401(k) plan, the Virginia Society of CPAs offers the following do’s and don’ts.

DO start early.

There’s a saying that “the key to successful investing lies not in timing the market, but rather time in the market.” That’s good advice for any investor and is especially relevant to investing in a 401(k). By starting early and contributing regularly to an employer-sponsored 401(k) plan, your savings can continue to grow on a tax-deferred basis.

DO take the time to understand the rules

Take the time to read the plan material your employer provides. Know when you can enroll and how much you can contribute. Find out if and when the company makes matching contributions and the number of years until you’re fully vested in those matching contributions. And, before investing, be sure that you carefully study the prospectus for any funds in which you are interested.

DO contribute the maximum.

Your employer sets the maximum contribution as a percentage of your salary up to a certain limit, which is $12,000 for 2003. If you’re age 50 or older, you’re eligible to make an additional “catch up” contribution of $2,000 in 2003. Many employers will match a certain percentage of your contribution to your plan. If you can’t afford to set aside the maximum, try to contribute at least enough to get the full company match. Not doing so is the equivalent of turning down free money.

DON’T underestimate the tax benefits of a 401(k).

Keep in mind that each dollar you contribute to your 401(k) is deducted from your taxable income so you avoid paying income taxes on that money until you withdraw it, typically at retirement. You may be in a lower tax bracket at that time and would therefore pay less tax. And since earnings in your 401(k) grow tax-free until withdrawn, your money grows at a faster rate than it would in a taxable investment.

DO invest for the long term.

Employers typically offer a range of investment fund options, which are professionally managed and diversified to spread investment risk. You decide how to divide your money among those options. Generally speaking, the longer your time horizon, the more you should invest in stock funds. Historically, over the long term, stocks have outperformed bonds and money market funds.

DON’T buy too much company stock.

Even if you’re confident that your company has a brilliant future, it’s generally not a good idea to have your employment income and retirement income both dependent on the fate of the same company. Be careful how much of your 401(k) assets are tied up in company stock. Most CPAs agree that you should not have more than 10 percent of your total retirement assets invested in your company’s stock.

DO rebalance your portfolio yearly.

An annual rebalancing of your 401(k) plan investments helps ensure that you maintain a mix consistent with your long-term goals. If you’ve decided to keep 50 percent of your 401(k) in stock funds, a poor market may erode your assets, and put your savings goals off track. By redistributing your portfolio investments, you may be able to better achieve your goals.

DON’T borrow unless it’s absolutely necessary.

Many 401(k) plans allow you to borrow up to half of your vested balance (with a $50,000 limit), typically at prime rate plus one or two percentage points. However, should you quit your job or get laid off before the loan is paid, the outstanding balance becomes due immediately. If you can’t pay it back, the outstanding loan will be taxed at your marginal tax rate. In addition, individuals under age 59 1/2 will face a 10 percent early withdrawal penalty on the loan amount as well.

DON’T cash out your 401(k) when you change jobs.

When you change jobs, you typically have several options. If your 401(k) balance is $5,000 or more, you may be able to leave your money in your former employer’s plan. You also can roll the money into your new employer’s 401(k) plan or into a rollover IRA. If the transfer goes directly from your old plan to your new employer’s plan or to a rollover IRA, you can avoid having taxes withheld.

DO consult with a CPA

With careful planning and effective follow-through, you will have the money you’ll need to enjoy your retirement years. A CPA can help you map out a plan for making the most of your employer-sponsored 401(k).

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at

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