OPINION – In prior articles, I talked about Investing Today for a Secure Tomorrow and Gauging Your Attitude on Investment Risk as it pertains to a Defined Contribution Plan (DC Plan). In a nutshell, you are a DC Plan for the long term.
This not a Vacation Plan, nor is it a Christmas Club Saving Account. It is an investment plan for the next 10, 20, 30 years and beyond! We spend and we spend to maintain our higher quality of life based on our cash flows and credit. I see people thinking of retiring only to find out they cannot. Why? Lack of an adequate savings account or an investment plan that will allow them the freedom to retire without worrying about their finances.
The Federal Government and the IRS have provided you with a golden opportunity of saving your money in a long-term investment program. Not only that, they provide you with a tax shelter on today’s income. If your employer is providing a matching program, you are being offered a deal you should take every day. Imagine investing $100 and an employer match of 50 percent. You start out with $100 and at the end of the day you have $150. That is a gift you cannot afford to ignore.
Defined Contribution Plans come in many varieties …401(k)…402(c)… 403’s…408(d)(3) and …457’s are a few of them. They are named after the IRS Code that regulates them. Each Plan is similar in that they are all tax deferred plans (tax exempt until withdrawal). Yet each Plan has different applications that provide a saving component and a tax shelter component.
There are also plans such as the Thrift Savings Plan (TSP) and the new myRA investment program.
- The TSP program is a Federal Government Program and is similar to a DC Plan except only federal employees and all branches of the military can participate in its program. If you are in the military or a federal employee, go to the Human Resources office and ask what savings and tax shelter program are offered to you.
- The new myRA (“My Retirement Account”) program, offers a new retirement savings account for individuals looking for a simple, safe, and affordable way to start saving. Savers will be able to open an account with as little as $25 and contribute $5 or more every payday. Your myRA balance will never go down, and there will be no fees. It will be made available through employers. The investments held in the account will be backed by the U.S. Treasury. It will be a Roth IRA account available to anyone who has an annual income of less than $129,000 a year for individuals and $191,000 for couples. It will be for savers who do not have access to an employer-sponsored retirement savings plan and is designed for savers who want an investment with a low opening amount.
Ask if your company has any one of these plans, if so, get the rules on how to use them and start securing your financial future by doing the following:
- Participate in your company plan.
- Contribute as much as possible (Invest the maximum allowable limit).
- Get vested before you pull out of a your Plan or change jobs.
What is vesting? Vesting in a retirement plan means giving you full ownership of your employee-employer account when an employer provides a matching contribution. After the vesting period the employer cannot come back and take what they put into your plan. If a person leaves the plan before they are fully vested, the employer may take back either all or part of their match. Rules vary from company to company and from plan to plan. Ask about the vesting rules your company may have in their plan.
According to the Internal Revenue Services (IRS): http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Vesting
“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a minimum percentage stated in the plan document of their account in the plan each year. When an employee is 100% vested in his or her account balance, he or she owns 100% of it and the employer cannot forfeit, or take it back, for any reason. Amounts that are not vested may be forfeited by employees when they are paid their account balance or when they don’t work more than 500 hours in a year for five years.
Example: Employer A sponsors a profit-sharing plan. The plan only has employer contributions, uses a 6-year graded vesting schedule and counts hours of vesting service based on a calendar year. John began working for Employer A in June 2005 and quit in August 2009. John worked at least 1,000 hours (the minimum number of hours of service required to be credited with a year of service under the terms of the plan) in 2005, 2006, 2007, 2008 and 2009. He had 5 years of vesting service and is 80% vested in his account.
If you have questions about your vesting, ask your employer or human resources department, read the Summary Plan Description or refer to your annual benefits statement.
The key is to get started as soon as possible. In the next series of articles, we will talk about financial planning. You must know where your money is going and how much you can begin to save for retirement.