You Control Your Money

Some people get a little nervous about contributing to a retirement savings plan. They think their money will be locked away in their employer's vault somewhere and it will mysteriously vaporize if they leave their job. Well, it doesn't work that way.

It's true that the big tradeoff for all the great tax benefits and other perks is the requirement that you stay invested until at least age 59 1/2.* But that's the point. Keeping your money invested for a long time is the best way to accumulate wealth. Remember, you may need to pay for your retirement mostly with your own savings (find out why in Retirement Needs).

With a retirement savings plan, you make the decisions about how your account is managed, including:

• How much to save. You choose the percentage of your pay you want to save. You can always change the amount. You're even allowed to stop your contributions, although that would be like trying to fill up a water bucket by turning off the spigot.
• Where to invest. You select investments that match your specific goals and your feelings about risk. But you're never locked in to your choices. You can change your mind and move money from one investment to another.
• Where to put your money if you leave your job. All of the money in your plan account, including the vested company match, is yours to take with you if you leave your job. You can move your pre-tax money directly into another employer's plan or an IRA to avoid taxes and penalties (called a direct rollover). Or, you could simply leave your money in the plan. Visit "Getting Your Money" for more on distributions and rollovers.
• Withdrawing money. You can withdraw money from your account before you reach age 59 1/2 for certain IRS-defined financial hardships. Visit "Getting Your Money" for more on withdrawals.*
• When and how to receive your money. After you retire, you decide when and how to start taking money out of the plan. Visit "Getting Your Money" for more on distributions.

Clearly, an employer-sponsored retirement savings plan is a great way to invest for the future. You can trim your taxes and receive the benefits of tax-deferred compounding. You decide how much you want to save and then the saving is done automatically with payroll deductions. Where else can you get a deal like that?

*A penalty does not apply to withdrawals from 457 plans, but the withdrawals may be subject to 20% federal tax withholding and applicable state taxes. Before-tax contributions that are part of a hardship withdrawal are not subject to 20% withholding. Federal, state and local taxes may still apply. (Note: For a 401(k) plan, if you withdraw your money and you are younger than 59 1/2, a 10% early withdrawal penalty may apply.)