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The Value of a DC Retirement Plan
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Defined contribution plans are among the most valued benefits in the American workplace. These plans allow employees to build up their retirement nest egg in a tax-deferred account and, in many cases, take the place of traditional pensions. Unlike pensions, however, DC plans require active participation, and that's a point that is lost on many American workers.
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In the case of employee-funded DC plans, participation starts with enrollment. You have to choose to contribute to a 401(k) or a 403(b), and a startling number of eligible employees fail to take this crucial first step.
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If you're young and on a tight budget, investing for retirement might seem like something you can put off for a few years. But you'll need to invest if you want a comfortable retirement, and sooner is always better than later. Fortunately, your DC plan is designed to make investing as easy as possible.
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How? By letting you invest part of your paycheck before you ever get your hands on the money. Even better, the money you stick in your DC plan doesn't count as taxable income, so you don't pay taxes on it. Instead, it grows tax-free until you start to withdraw it, usually in retirement. As an added benefit, your employer might even contribute free money to your account by matching a part of every dollar you invest. You may have to wait a while before they actually let you have the match money, though.
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Once you sign up, your company will automatically deduct your contribution from each paycheck and invest it. You can contribute up to $ of your salary in . If you receive a match from your employer, your total annual contribution for all DC plans can be up to 100% of your annual salary or $, whichever is less.
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If you're hesitant to contribute to your DC plan because you anticipate big expenses down the road, don't worry. Most DC plans allow cash withdrawals, though you'll probably have to pay penalties and taxes if you take money out before you retire. However, many plans will you to take out a loan on your DC account should you suddenly need the money you've tucked away.
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You don't have to worry about making a choice to contribute with plans where your employer kicks in the cash, such as money purchase and profit sharing plans. But participation of another kind can still be an issue--namely, making an effort to choose wise investments.
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Too many employees take a passive approach and let their money sit in conservative "default" investments--usually money markets or stable value funds. Funds invested in such investments may grow a little, but they probably won't keep up with inflation. If you want to increase your chances of meeting your goals, you should invest some of your money in stocks, especially if you're 10 or more years away from retirement.
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In general, taking an active approach with your DC plan--whether by selecting investments with solid growth potential or by choosing to contribute part of your salary--is one of the smartest moves you can make. It can make the difference between living your retirement dreams and just getting by.
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