INSIDE FINANCE
A Valentine for All Seasons?

By Robert M. Jaffe, MBA, AAMS
February 10, 2006

Valentine's Day is just around the corner and here's your opportunity to give yourself a very special gift that will outlast perfume, candy, flowers, even jewelry. In addition to "Three Little Words", think three little numbers……401(k).

You will have a gift that really keeps giving…to you. No doubt you're already familiar with this defined contribution (yours) plan. 401(k) refers to an IRS designation for one form of retirement plan that can be provided by your company. If it doesn't offer one, run, don't walk, to the person in charge and find out why.

There are quite a number of rules and regulations covering this very popular form of retirement plan and you should discuss what's involved with either the appropriate individual at your company, most likely whoever is in charge of benefits.

Presuming your company does offer a 401(k) Plan, you are fortunate; because you may contribute up to $15,000 from your salary in 2006 and if you are 50 years of age or older you may add a "catch-up" contribution of an additional $5,000. The amount you contribute is tax-deferred until time of normal retirement, usually age 65. Many companies may provide a "match", at their discretion, to your contribution. This depends on a number of factors not the least of which is how generous the "boss" may be. A match is free money for you, another "Valentine". The details are all spelled out in the company's Plan Document that include such items as vesting (when the match money becomes yours; the money you defer is always 100% yours), loans against the plan, investment options and so forth. The "Valentine" is your ability to put away savings that should grow for your retirement on a tax-deferred basis.

Let's examine the case of a 35 year old employee whose salary is $52,000. For the purposes of illustration, let's assume this lucky person is you. Your weekly paycheck is $1,000 gross. You elect to contribute 20% to your 401(k). The company match is 25% of up to 4% of your gross pay in 2006.

The chart (below) illustrates how your contribution and the company match would add to your retirement savings based upon your taxable income being reduced by 25%.

By deferring $200 per week from your paycheck, your taxable income would be reduced by $150 so that a $10,000 deferral would "cost" you $7,800. In addition, the match would add an additional $520 (1% of your gross salary), thus putting nearly $11,000 "in the bank" at a cost to you of $7,800. Some Valentine!

I hope this whets your appetite to meet with your financial advisor for more information and make this Valentine's Day one to remember.

Please Email bob@cfsias.com with your questions.

Other Finance Archive Articles

INSIDE FINANCE will appear regularly, addressing financial matters of interest to our readers. Any questions? Email bob@cfsias.com

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member NASD/SIPC. Cambridge and CFS are not affiliated.

The preceding article is for informational purposes only and should not be used as the primary basis for an investment decision. Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results. All examples given are hypothetical and do not reflect actual investments. The views expressed in this article are those of the author and are not necessarily those of Cambridge. Bob Jaffe is Managing Director of CFS Investment Advisory Services, LLC in Totowa and has been a Clifton resident since 1984. Active in community affairs, Bob is Past Board Chairman of the North Jersey Regional Chamber of Commerce and president of its foundation board. He serves as a commissioner on the Clifton Rent Leveling Board and is Vice President of the Clifton Rotary Club. Representatives of Cambridge do not offer tax or legal advice. Consult a professional for your personal situation.