A Tax Fact from H&R Block Financial Advisors’ Investment Management Department

If rocky markets are scaring you off from participating in your employer-sponsored retirement plan, you are not alone. Many young investors are reluctant to contribute to any plan whatsoever. Many not-so-young investors have chosen to lower their contribution amounts, or to pull out all of their funds.

This behavior begs the question – if you are not saving while you are working, how will you fund your retirement? Lyle Schonberger, Director of Research for H&R Block Financial Advisors’ Investment Management Department, has some ideas for new investors and those who are not-so-new at investing.

Considerations for young investors

• Be sure to contribute enough to receive the full matching contribution (where available) from your company. A company match can help your investments grow.  Schonberger wonders, “Why leave money on the table if your company is willing to add to your 401(k) or 403(b) plan? Take advantage of it!”
• Afraid you might need the money sooner, rather than later (at retirement)? While the contributions you make in your company-sponsored retirement plan are really earmarked for retirement, they are available. When unexpected circumstances arise, many plans allow employees to access their account balances before retirement through a loan or a withdrawal.  Note that interest and penalties will apply.
• Some companies do not offer retirement plans. Schonberger suggests, that if the company for which you work does not offer a 401(k), 403(b) or other similar plan, consider starting your own Roth or a traditional individual retirement account (IRA).
• Joining a company’s employer-sponsored retirement plan does not mean you have to work there for the rest of your life. One of the reasons why plans like 401(k)s have become so popular is that they are portable: generally speaking, you can take them from job to job (with some exceptions) or roll assets over to an IRA. So – do not feel like contributing to your retirement plan means you have to be there until you retire. You have options in the event of an emergency.

Considerations for not-so-young investors

• Ensure that your plan still meets your needs. Says Schonberger, “Despite recent market volatility, many plan participants may underestimate the risk levels associated with holding high concentrations of company stock.” The truth is that older employees holding the highest amounts of company stock have the least amount of time to recover if their company’s stock happens to fall. Many employer-sponsored plan participants don’t realize that holding a large concentrated position of company stock could act as a hindrance to the long-term growth of their portfolios.
• Even if you are contributing the maximum to your company-sponsored retirement plan, you can open an IRA. This double-savings option will help you save more than you could in an employer-sponsored plan alone. Participation in a 401(k) or other employer plan could, however, impact the deductibility of an IRA. Also, there are income limits for contributing to both Roth and traditional IRAs.
• “After age 50, you can take advantage of the 401(k) catch-up provision and add an additional $5,000 (subject to COLAS—cost of living adjustments) to the $15,500 contribution limit (these contribution amounts can change depending on the IRS rules),” says Schonberger. Then, at age 59 ½ you may begin to withdraw money from your retirement accounts penalty-free.  Or, if you like your job, keep working. You will be both earning and saving more money.

Diversify
Be sure to diversify between stock and bond funds.  Additionally, consider diversifying your equity funds between large, mid, and small cap, and also international.  The U.S. markets now make up less than half of global market capitalization, making international exposure an important part of a portfolio.

No matter what your age, work with a financial advisor and a tax professional to ensure that your company-sponsored retirement plan is an integral and effective part of your overall investment and savings plan.

This Tax Fact is brought to you by H&R Block Financial Advisors.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.