“Baby boomer is a term used to describe a person who was born during the Post-World War II baby boom between 1946 and 1964.^[1][2] Following World War II, several English-speaking countries – the United States, Canada, Australia, and New Zealand – experienced an unusual spike in birth rates, a phenomenon commonly referred to as the baby boom.^[3] The terms “baby boomer” and “baby boom”, along with others expressions, are also used in countries with demographics that did not mirror the sustained growth in American families over the same interval.^[4] ”

That would make the oldest baby boomers 62-63, and the youngest about 45. Basically, the oldest of the group are entering into retirement now or are just a couple of years from retirement. On the other hand the youngest are around 20 years away. By now the oldest of this group should have changed their portfolio holdings to accomodate their low risk tolerance, and the youngest are likely to have half of their retirement investments tied up in equities or stocks or more likely in mutual funds through a 401k plan. What about those in the middle? Hopefully they’ve changed their asset mix from the riskier to something safer, however, it is unlikely and they’re overexposed to risks they may not be able to recover from in a few short years.

This brings in some harsh realities in finding ways to survive for many of our parents. As a generation “x’er” myself, I can see that there is the potential that I will have to support them financially some time down the road. Otherwise, mom and dad may be forced to work until they’re physically incapable, possibly resulting in the inevitable financial drain on us. So, not only is it important for us to pay attention to our own portfolios as we age, it could be argued that making sure our parents understand what is going is equally or even more important. Even more, it is important not to act irrational at times like these, trying to bail out your parents by making large changes may actually hurt them more than help them. Be wise, read my site and learn more about evaluating their current situation and their (and your investment horizon) options to address this financial crisis properly.

The only bright side to the picture for us x’ers is the fact most of us still have 30 years of investing left, and if history is any indication the market will rebound and we will all make back far more than we’ve currently lost.

Confused about the bailout? Read my article that explains what is going on in really simple terms.

A Roth IRA is an Individual Retirement Account (IRA) allowed under the tax law of the United States. Named for its chief legislative sponsor, Senator William Roth of Delaware, a Roth IRA differs in several significant ways from other IRAs.

Overview

Established in 1996 (Public Law 105-34), a Roth IRA can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). As with all IRAs, there are specific eligibility and filing status requirements mandated by the Internal Revenue Service. A Roth IRA’s main advantage is its tax structure. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (self-directed IRA).

The total contributions allowed per year to all IRAs are limited as seen below (this total may be split up between any number of traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed):

*Starting in 2009, contribution limits will increase in $500 increments based on inflation.

The 401(k) plan is a type of employer-sponsored defined contribution retirement plan under section 401(k) of the Internal Revenue Code (26 U.S.C. § 401(k)) in the United States, and some other countries.

A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or “deferred,” into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies’ 401(k) plans also offer the option to purchase the company’s tax deferred. Before the January 1, 2006, effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn. With the enactment of the Roth provisions, participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separate designated Roth account, commonly known as a Roth 401(k). Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after-tax basis (i.e., income tax is paid or withheld on the income in the year contributed). In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as after-tax basis and may be withdrawn without tax. The growth on after-tax amounts not in a designated Roth account are taxed as ordinary income.

The above information and more can be found here and here.

So, you’re ready to start investing? Well that is great and all, but maybe you should consider doing some research before you start your journey. It’s all about saving you time and money, as blind investing is akin to gambling. It is much better to devise a plan before you get started, otherwise you have no idea what your goals are or should be and what type of plan you should use to invest. I’ve created a quick list of questions to start as your investorguide or guide to understanding this investment process.

Bottom line, you need ask yourself the following questions (and more) before you get started with investments, unless of course you are a contrarian:

1. How long do I plan on investing for?
2. What is the right asset mix for me?
3. Where to invest?
4. How should my investments change as I get older?
5. What are my investment options?
6. How should I invest? What are the best brokers or brokerage firms available to me based upon cost and service?
7. How much should I invest? (whether it be $1000, $2000, $5000, or $10000 and above, it makes sense to understand how much you should be setting aside and investing.)

This leads to more questions such as:
1. Should I invest in a mutual fund or is it better if I invest in individual stocks?
2. Should I invest in gold?
3. Do I need a financial advisor? (Ask what type of financial advisory services they offer before signing up and what credentials they have; Are they a certified financial planner or CFP for short? Are they simply some other type of financial advisor without any real qualifications? Financial advisory services and selection should be important to you). Note that there are several shady financial consultant in the financial industry that hand out bad financial advice).
4. Keep in mind, there is no such thing as “free investing,” however there is plentiful free information out there to help you, starting with this investing article from an insightful investing blog.

Check out many more of my articles and lessons (listed to the right) that will help you answer most all of the above questions!

Typically, when you start your new job, you will have a waiting period until you are elgible to get 401k matching contributions from your employer. However, it is worth the wait. My employer for example, matches 100% up to 6% of my pay. That sounds more confusing than it really is, let me further explain; Say I make $100,000 per year - if I was having 5% of my pay deducted and invested in my 401k, my company would match 100%, thus my 401k deposits would automatically double, for FREE, and instead of having $5,000 invested per year, I would have $10,000. You can’t beat that! Now take that same example again, say I had 10% of my pay deducted to be invested in my retirement plan; My company would match 100% of the first 6%, so my $10,000 would actually be $16,000. You’d be a sucker not to participate in the plan, even if the market was only returning less than the rate of inflation at that time.

Truly, an employers match is free money, however, in many cases in order to collect all that money you must be fully vested (if you’re not sure what this means, check out my article on vesting).

401(k) debit/credit cards may or may not be a good idea. In most cases not, but one way or another many people have been using them lately. A man by the name of Charles Schumer, a New York Democrat, has introduced a bill to prevent people from even obtaining an 401k debit or credit card. While I agree these credit or debit cards are a terrible idea, I do not condone Washington taking away our right to choose. I suppose as the economy gets tougher and people start looking to different avenues to help get by, they choose this method, instead of a hardship withdrawal or loan, as it is quick and handy and much easier to spend.

So, you’re thinking of borrowing against your 401k?

Most experts would say there is no right time to take a loan or withdrawal , because by taking out this money you are not actually using your retirement savings for the purpose it was intended. However, if you feel a loan or hardship withdrawal is the your last financial option, you should learn what it really means to borrow the money.

Loans

Taking out a loan is probably the easier way to get money out of your 401k. And for many, there are definite benefits involved in this financial decision. One is that you can borrow up to 50 percent of your vested account balance – or as much as $50,000 – tax- and penalty-free, and for most any reason. Because you get about five years to pay the loan back (with interest, of course), the financial strain involved is a lot less strenuous than with many bank loans. Another benefit is that you are able to contribute to your plan while your loan is still outstanding. For many, the biggest perk is that no credit check is conducted to determine eligibility. However, there is one major con; If you leave the company while holding an outstanding balance on the loan, you may have to pay if your 401k loses money on investments.

Hardship Withdrawals

Unlike the loan, a hardship withdrawal can be more difficult to get your hands on – because of the limited reasons you can qualify for it. Below you can find the short list of reasons an employer will allow you to take out a hardship withdrawal:

* Un-reimbursed medical expenses for you, your spouse, or your dependents.
* The purchase of, or repairs made to, a principal residence.
* Payment for you, your spouse, dependents, or children who are no longer dependents for college tuition and other related costs like room and board for the next 12 months.
* Payments that will stop you from being evicted or stop a foreclosure on your home.
* Funeral expenses

As mentioned, there are strict guidelines involved in a withdrawal:

* The withdrawal must be due to an immediate and heavy financial need.
* The amount from the withdrawal must be able to satisfy the need (you can’t have other resources available that you’re not using).
* You cannot withdraw a larger amount than you actually need.
* You must have first exhausted all other options in distributions and nontaxable loans under your 401k plan.

Many believe there are no true benefits to taking out a hardship withdrawal. One reason is because upon withdrawal you are subject to a 10-percent penalty for taking out funds before the eligible age of 59 ½. In addition, your withdrawal is subject to additional income taxes based on your tax bracket. Even worse, in some cases, after you withdraw, you are not allowed to contribute to your plan for six months, unlike the loan which allows you to continue contributing.

Again, most experts would advise that you not take any money away from your 401k, but if you must, now you`know the pros and cons of withdrawals and loans, you can choose which is best for you. Before you make any decisions, make sure the specific guidelines and rules your company requires, and be sure to check and double check all of your other financial resources for sources of money besides raiding your 401k, it is your retirement after all. You may find there is a better solution out there for you by simply cutting your expenses.

Why wouldn’t I care? Because I’m 30 years old and will be investing for over 30 years more. I remember my mother fretting back in 2001, telling me she was going to take everything out! I exclaimed “NO,” there is no way in hell you should do that. She was convinced that the best thing she could do was stop the bleeding now. I convinced her, that she would be in the market for another 15-20 years, let the market go up and down, in the long run you would be way better off. And she was way better off after following my advice. Her portfolio losses of nearly 20% rebounded and she was able to make back all that money she was convinced she never would. We should keep in mind these things when the stock market faces tough times. Those whom continually invest and stick to their plan will profit the most, not the ones that get scared and try and run to protect themselves. You should have been invested in bonds and such by now if you are nearing retirement, if not that is a mistake of your own, and you should ride out the wave if at all possible.

In recent years, Congress came up with catch-up contributions through The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) because they felt that Baby Boomers wouldn’t have enough in their savings to properly retire. To make up for what they thought may have been missing, they began allowing Boomers to add more to their investment pots once they reach the age of 50 – or more specifically, in the year that they reach their 50th birthday. So now, in addition to the traditional 401k plan that allows you to save up to $15,500 of your eligible pay each year like everyone else, you can also take advantage of catch-up contributions, which allow you to save up to $5,000 more each year.

Catch-up contributions work well whether you belong to one plan or two – or even if you belong to a company that doesn’t allow it. For example, if you belong to two 401k plans at the same time, you can make contributions for the maximum amount to both simultaneously. So instead of a max of $5,000 that is allowed with one plan, you could contribute for a total of $10,000 per year if under two plans. Also, if you belong to more than one employer (and thus more than one plan), even if neither company allows for catch-up contributions, you can still contribute up to $20,500 ($15,500 for standard elective deferrals plus $5,000 extra in catch-up contributions) total between the two plans – as long as you don’t exceed $15,500 in either plan. In other words, you can contribute $15,500 with one plan and $5,000 in the other. Or $10,250 in both plans. Or $7,500 in one and … you get the picture, right?

The eligibility for catch-up contributions is as follows:

You must be 50-years-old or turning 50 within the calendar year.
You must be getting paid from your employer (since the contributions are actually deductions from your paycheck).
You must contribute the amount that will help you reach your elective deferral limit by the end of each relevant year.
And you cannot be in the 6-month period of non-contribution because you’ve received a financial hardship withdrawal.

Catch-up contributions are available for the 401k, 403b (Tax Shelter Annuity) and 457 (Deferred Compensation) plans, in addition to IRAs. Because you can participate with multiple plans, it is good to know that the rules differ among them. So, for instance, if you have rolled over your retirement funds to say an IRA since you’ve reached the age of 50, you will need to make sure to check for new contribution guidelines that are different than what you’re used to.

It is good to note that while this plan is offered by over 90 percent of businesses, they are not required to match your contributions. So be sure to check with your employer to see how this works at your company. But whatever you decide, you’ll probably find that taking this route will be more beneficial in helping you save than by trying to set up a savings plan on your own.

So it’s time to make some decisions regarding your 401k, and to be honest, you haven’t truly given it a second thought. When you were hired with your job, you simply filled out all of the forms shoved in your face, signed on some dotted lines, and shook the hand of your hiring manager/HR representative. However, now that you’ve been investing part of your income into a 401k plan, you want to know more – including, what it means to be vested. Being vested simply means that you’ve earned the full amount of your company’s match. Yep, they give you a match, but you’ve got to stay there long enough to earn it. Companies vary in their requirements, some require 5 years of service, and you earn a percentage every year you are there. In the case of a company whom requires you to be there 5 years before you are fully vested, you may earn like 20% a year of their match. By this I mean, after one year, you are guaranteed 20% of their match, after two years, you would have earned 40% and so on.

Now, if you don’t understand the basics of a 401k plan, you’re probably scratching your head right now, so let’s look at this more closely. The 401k plan was created as a sort of security blanket for those looking to fund their retirement. Wrapped up in that blanket is money that you’ve saved over the years, in addition the company you’ve worked for has contributed for you. With some companies, the longer you stay with them, the more they will match on your behalf.

For some, the bad news comes when they leave their jobs early and realize that they are not fully vested in their plan and therefore don’t have access to all of the money they thought they had. How can this happen? Keep in mind that you must work for a company for a certain amount of years to really claim all that generous match.

One thing to keep in mind with vesting is that contributing during the entire predetermined number of years before being fully vested is not required to have access to the money you’ve contributed. However, some companies may put certain restrictions on your ability to withdrawal if you are not leaving the company.

Something else to consider, say once again your company requires 5 years before you are fully vested, and you only started contributing in year two of employment, when year 5 rolls around, you’re still considered fully vested. Also, if a new vesting schedule has been implemented that changes the number of years you must work before becoming fully vested, don’t worry because the new rules don’t apply to you.

Typically, when people cash out their 401k, they have lost their job and or are switching jobs. More often than not, these people simply don’t understand their options and see quick cash in sight. However, if you understood the immediate cost of cashing out and the opportunity lost if you would have rolled it over into an IRA or something similar; you would see how cheap, reckless and stupid that benefit of cash in hand now is. More or less, you get quick cash a major cost now and to your future. I understand that in many cases you need that money now, things may be tight and you just flat out need it, but listen to me here, decide if you really do:

Let’s say you have $10,000 you’ve built up in a few years or so, and you’re getting a new job or have been let go. If you decide to cash out instead of rollover your 401k into an IRA you will pay the following:

Your 401K $10,000
Less (Early withdrawal 10% Penalty) 1,000
Less (Assumed 25% Federal taxes) 2,500
Less (Assumed 6% State taxes) 600
—–
$5,900

At the time your disbursement is made, your employer will only deduct 20% mandated by the IRS as prepayment towards your federal income taxes. You will still have the additional penalties and taxes due at tax time (whatever additional federal and state taxes and early withdrawal fees).

Note: The 10% only applies if you withdrawal before you turn 59 1/2.

As you can see in the example above, only 20% will be deducted at the time of disbursement, you will still have to pay more. So, out of that 10,000 you thought you would get back, you really only got back 59%. Compare that to rolling over your 401k into an IRA, and letting that money continue to work for you. Say you were 30, and left that money alone until you turned 60. It would have been worth (assuming a 10% return) around $175,000. This is saying, I would have lost $165,000, not adding a dime to the initial $10,000 if I would have just left it alone.

As you can see, that $5,900 is nothing compared to just leaving it alone. In the end, it’s your choice, is it really worth it?