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Tax advantage of many employer retirement plans

Radio Transcript, 2 minutes 35 seconds, for use during week of Feb. 4.

Description:  Penny and Susan talk about employer defined contribution plans

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection trust, providing investor education on the web at: investorprotection.org.

Susan: Penny, I’d like to talk a little more about defined contribution retirement plans offered through an employer.  I have a few questions I think you can help with.

Penny: Sure, Susan.  What’s on your mind?

Susan: I have a 401(k) and I know that the money I contribute with  is “pre-tax” dollars.

Penny: That’s right.  One of the benefits of these types of defined contribution plans is that you can save on your tax bill and invest for retirement at the same time.

Susan: Will that money be taxed eventually?

Penny: Yes -- You’ll pay taxes on the growth when you withdraw the money after you retire.  However, by deferring the taxes now, you can invest the money that would have gone to taxes as part of your retirement contribution.

Susan: So, if I had $4,000 to put into a defined contribution plan each year, I could invest the entire $4,000.

Penny: Yes.  Whereas if you paid taxes on that money first, you might only have – let’s say-- $2,800 dollars to invest each year.  The amount would depend on your tax bracket.

Susan: Is there a maximum amount that I can invest each year?

Penny: The maximum amount allowed by law is 15,000 dollars--or 20,500 dollars if you’re over 50, but some company plans have lower maximums so you’ll want to check with your employer to find out for sure what your maximum investment is.

Susan: My 401(k) offers a number of investment options.    I can invest in stock, bond and money market funds.  How do I decide?

Penny: When you’re looking at the options offered by your employer’s plan, you’ll want to consider your risk tolerance, what kind of return you need and how far into the future your retirement actually is.  Your choices will determine the amount of money you’ll have available when you retire.

Susan: Thank you, Penny.  This has been very helpful.

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

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Updated February 6, 2008