With a 401(k) plan, your employer provides a way for you to save for your retirement. This type of plan presents one of your best opportunities to invest in yourself and build the retirement nest egg you'll want.

Contributions
In addition to investing for your retirement, a 401(k) plan offers the benefit of pretax savings. You contribute before taxes are withheld from your paycheck, so your current taxable income is lowered. You choose from a selected group of investment options in your plan and any earnings on your account are reinvested.

Your employer has the option of matching a portion of the amount you invest. For example, if you make $25,000 this year and you contribute 4% of your income to your 401(k) account, your annual contribution would be $1,000. If your employer match is 2% of your annual income, that's an additional $500 going into your account.

The 2001 Tax Act increased the amount of money you can contribute to a 401(k) plan:*

Contribution Year Annual Contribution Limit Additional Catch-up Contribution Limit for Individuals Age 50 and Older Annual Combined Contribution Limit for Individuals Age 50 and Older 2003 $12,000 $2,000 $14,000 2004 $13,000 $3,000 $16,000 2005 $14,000 $4,000 $18,000 2006 $15,000 $5,000 $20,000 2007 and later Will increase in $500 increments as needed, based on inflation Will increase in $500 increments as needed, based on inflation Will be based on increased amounts

*Contact your plan administrator for specifics regarding your employer's plan.

Back to Top

Loans and Hardship Withdrawals
Your employer's plan may allow you to borrow from your 401(k) account, provided you pay back your account with interest. Check with your employer to find out about any loan option available in your 401(k) plan and the loan policy.

If you have a financial hardship, your 401(k) money may be available to you for special uses such as the cost of medical care or certain educational needs. IRS rules govern these "hardship withdrawals." For example, if you make a hardship withdrawal, you cannot contribute to your 401(k) account for one year following the withdrawal (or six months following the withdrawal beginning in 2002 if your employer plan has adopted this provision from the 2001 Tax Act). Contact your employer for more details.

Back to Top

Taxes
You can save money on each year's federal (and possibly even your state and local) income taxes by investing in a 401(k). Contributions made into a 401(k) plan are deducted from your gross pay, which is the amount of your paycheck before income taxes are withheld. The more money you put into the plan, the less income you have to report on your federal income tax return that year up to the maximum limit.

Consider this example: assume you are in a combined 33% tax bracket (27% federal, plus 6% state and local tax where applicable). If you contribute $1,000 to your 401(k) plan during the year, that $1,000 is not subject to income taxes until you withdraw it, meaning you can trim your tax bill for the year by $330 ($1,000 X 33%).

Your 401(k) contributions and earnings also grow tax deferred until you make a withdrawal. Although the money is eventually taxed at retirement when you begin making withdrawals, you may fall into a lower federal income tax bracket at that time.

Back to Top

Long–Term Benefits
As the years go by, the money you invest in your 401(k) plan can continue to grow and compound tax deferred until you withdraw it.

As an example, let's say you invest $100 each month ($1,200 per year) for 30 years, for a total amount invested of $36,000. Now, assume you're in a combined 33% tax bracket (27% federal, plus 6% state and local tax where applicable) and that the annual growth rate of your investment is 8% with all dividends reinvested. After 30 years, the value of your investment would be $94,980 in an account that is not tax deferred, while it would be $141,761 in a tax–deferred investment.

This example is for illustrative purposes only and is not intended to represent a particular investment product.

Back to Top

To learn more about American Century Investments or other mutual fund companies, visit Fund Companies. To research a fund, visit Fund Selector.