When will you need your money?
Jan 30 '00
Last year at tax time we had one, and just one, reason for rejoicing. The spouse's 401k saved us big tax dollars, keeping us from being bumped up to a higher bracket. Whew!
Money taken from a pay check and put into a 401k reduces the amount of a salary for the purposes of taxes. And the difference in taxes can be significant. In addition, 401k money grows tax free. And, investments held in a 401k can be sold within the account with no tax penalty. So, if your money is in an aggressive, tech-heavy mutual fund and you think the end is near for speculative tech, you can sell the mutual fund and keep all the profits. The money is ready to be reinvested when you are ready.
Make that same move with a non-sheltered stock or stock fund and you have to pay a capital gains tax.
But, great as a 401k is, you will pay dearly if you need to get your money out to buy a new car, get a CAT scan for the family feline or pay for your mom's home health aide. Not only will all taxes be due on the money, but you will pay a heft penalty besides.
Maybe the most important consideration is: How much money are you quite sure you will not need for emergencies? That money can safely be put away, not to be touched until retirement or under special circumstances allowed under the tax code. But it is also a good idea, I think, to keep some discretionary money out of the 401k plan and put into a stock fund or savings account where it can be withdrawn if it is needed.
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