The Money Compass: Where Your Money Went and How to Get It Back

Chapter 6

Four-Oh-One-Kay Tales

Why aren’t you signed up for the 401K? I’d never be able to run that far.

Scott Adams, Dilbert, May 2, 2001

A lot of people become pessimists from financing optimists.

—C. T. Jones

Technically, a 401(k) is a defined-contribution plan for retirement that allows wage earners to reduce their taxes by having deductions taken from their pay and reducing their taxable income. There are other tax-deductible plans like 401(k)s for nonprofit organizations, but all are designed to reduce the wage earners current income taxes and create an incentive for retirement saving. All earnings from the investment plan are tax deferred until the retiree begins to receive them. The saver is pushing his tax payments into a future period when he hopes he will be in a lower tax bracket and consequently get to keep more of his earnings. In 2006, Roth 401(k)s became available allowing wage earners to contribute after tax monies into a retirement plan. These contributions had already been taxed so at retirement their previous contributions are received tax free along with the possibly that investment earnings could qualify for a nontaxable distribution. The funds are invested in the stock of companies or some combination of bonds and stocks. Many financial advisers, company managers, and financial institutions tout the advantages of these plans for employees or investors. In addition, there are the management fees.

Wish I Had Thought about That . . .

I thought I was smart ...