Economic slowdowns are always quick to hurt business spending, whether it is on new production components or human resources. Employees are feeling the economic pinch, faced with potential job loss and certain benefit cuts. The quickest and easiest solution for most businesses is to suspend or cut out indefinitely the 401k matching programs that add billions to their expenditures.
Like Social Security and Medicare taxes, 401k programs are an additional burden on the profitability of a company. Workers have grown accustomed to giving themselves their own raise, often as much as 3% per year on the typical match of 50% on 6% of total income. This is a lucrative offer to an employee who wants an initial 50% return on the first year of their investments, but without the match, are 401k programs even worth it?
The IRA: The Exact Same Thing
IRAs are very similar to a no match 401k, except for a greater variety of investment choices and vehicles to help power your financial future. Unfortunately, IRAs do have strict limits of $5000 for investors 49 and below, and $6000 caps for investors above the age of 50. (These are the 2009 limits and will be subject to change pending the current inflation rate.) The 401k programs offered by your employer has much higher limits, with as much as $16,000 per year for investors under the age of 50, and for those over 50, a maximum contribution of $22,000 per year. After exceeding the income limit for traditional IRAs, consider a switch to a Roth IRA, as you'll be forced to invest after tax, but will enjoy the handsome rewards in the future when your withdrawals are no longer taxed as income. (Tax rates will inevitably be higher in the future than at present.)
Have Problems Saving?
Many investors favor the 401k simply because it is so easily set up and maintained. The paperwork is short, often a few columns for tax information, as well as the ability to denominate your investments as a percentage of your income. Employees who tend to work overtime (and have less time to invest as a result) will take comfort in the set-and-forget features that 401ks offer. You'll also be able to reallocate whenever you please and change your investment numbers by contacting your employer.
Right off the Check
The psychological benefits of a 401k are simple; you'll never notice the money you're pouring into your 401k. Rather than have to take money from your savings to fund up an IRA, your contributions to your 401k come directly off the top of your check before taxes. Most consumers and savers alike will hardly notice a 4% – 5% difference in their bi-weekly checks, as for most people, the difference is just a few nights out to eat.
To Each His Own
When it boils down to the fundamentals, the decision is left to the hands of the investor. Some people may like the simplicity of limited 401k selections and target date funds, while more experienced and hands-on investors like self directed IRAs to fine tune their investments. If there is anything that investors should remember, there are plenty of consumer choices in the land of retirement planning, especially as banks are crumbling. Be sure to look into investment choices and fees, as some companies will charge an annual fee for maintaining an IRA while others won't. Often it depends on the size of your nest egg, but a little bargain hunting and negotiations can pay off in your golden years.