Diversification has many facets and it protects you.
The benefit to using federally regulated 401k, 403b, and 457 investment plans offered by your employer is that a portion of your earned income can be placed in these plans on a tax deferred basis. You pay no income taxes on this money until you withdraw money from the account. Federal regulations allow employers to let you to invest about $14,000 annually through each plan.
These accounts generally include an array of choices such as fixed interest vehicles and stock and bond investments that automatically diversify your investment holdings. Some employers provide a matching percentage. This is free money that you won’t get until you invest through these plans.
It’s costly to withdraw money from the plan permanently until you’re age 59 and a half. This keeps you from squandering all your money in your peak earning years so you have a chance at building wealth you’ll need to maintain comfort in later years. If taken before then, except through a loan from the plan administrator that you pay back on schedule, you must pay income taxes on the money and a 10% penalty to the IRS. In addition, you’ll pay the loan in after tax dollars that will be taxed again when you withdraw it in later years. If money is taken due to a qualified hardship or on an equal annual payout basis over your projected life expectancy, no penalty is due.
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Published in: Personal Finance