WANT A BETTER RETIREMENT? USE YOUR TAX REFUND!

On September 4, 401(k) Day, put your tax refund check to work for YOU in your 401(k) Plan

Chicago (August 22, 2001) – What are you going to buy with your IRS tax refund check?  How about a better lifestyle when your regular paychecks end - also called "retirement?"

On your last day of full-time work, you may be headed for 20 to 30 years of financial independence.  That's if you leave your regular job at age 60 and live to 80 or 90.  During that time, you'll be living on what accumulated in your retirement plans plus Social Security, money from your other financial resources, and any part-time pay. 

"The price of financial independence at retirement is high," said David L. Wray, president of the Profit Sharing/401k Council of America.  "An income of just $10,000 each year for 30 years will chew up $300,000. That's not counting the extra you'll need to keep up with inflation," he added.

And you thought your home was the most expensive thing you'd ever buy.

"Whatever retirement lifestyle you want, you probably need to start buying it today by saving and investing wisely," said Tom Kmak, president of J.P. Morgan/American Century Retirement Plan Services.  "If you wait until the last few years of your full-time work, your only choices may be to keep working, settle for less, or both," he added.

Why not invest your tax rebate on 401(k) Day, September 4, 2001 in your 401(k) plan? (Go to  http://www.401k.org  for more on 401(k) Day.)

Here's an estimate in today's dollars of how much your rebate could buy the year you reach age 65. To calculate this figure, it's assumed the future investment performance tracks the stock market's historic average (roughly 10%), then it takes out inflation (roughly 3%) leaving 7% real growth each year.

Estimated amount (in today's dollars) that your refund could buy the year you reach 65:

By using your retirement plan, you could get a bigger bang for your rebate bucks.

But you can't simply put your refund check directly into your employer-sponsored retirement plan account such as a 401(k) or 403(b).  The IRS says your employer must take the money out of your paychecks to put into the plan.  

So here's a roundabout way you can get the refund money in your plan.

Use the 800 number or website listed in your retirement plan booklet to increase your plan contributions by just 2% of your pay.  Put your refund check in the bank and use that money to make up for the extra you're putting in your account.  Here's an estimate of how long it will take using this approach to get the refund amount into your account. The IRS, and sometimes the plan, limits how much you can contribute.

Putting 2% of your pay in your retirement plan for a few months and spending your rebate:

"In a 401(k), every dollar you put into your account pretax goes in before Uncle Sam withholds income taxes," explained Kmak.  "So say 25% of your pay is being withheld for taxes.  When you put a dollar in your account pretax, the 25 cents that would have been withheld goes into your paycheck not to Uncle Sam.  Your paycheck is only 75 cents less.  Your account is a dollar more."

Naturally, Uncle Sam provides this incentive with some strings attached (IRS limits and penalties). For example, often money in the plan cannot be readily withdrawn while you're working.  And, as you probably guessed, when the money that hasn't been taxed is paid out, it will be taxed at whatever the rates are then.

As another incentive to save, many employers make contributions to your account when you do.  Typically employers that make these matching contributions add 50 cents for every dollar you put in up to the plan limits, but it can be more or less.  Ask your HR rep or contact the plan's recordkeeper for details.  Also ask how long you need to work before the employer's contributions become your's (called vesting).

By increasing your contributions 2%, even for a few months, you'll increase your retirement lifestyle.  So what might happen if you kept contributing the extra 2% for several years?  Ignoring inflation for the moment, if your annual pay increases 2% and your investments return 7%, here's an estimate of how much that would add to your future lifestyle shown in the buying power of today's dollars.  

Putting 2% more in your retirement plan for several years

"September 4th is national 401(k) day.  I can't think of a better way to celebrate than by putting your tax rebate to work in a 401(k) plan.  Just increase your contribution by 2% of your pay for a short time, or better yet, for the rest of your working career," added Wray.

The Profit Sharing/401(k) Council of America (PSCA), a national non-profit association of 1,200 companies and their 6 million employees, advocates increased retirement security through profit sharing, 401(k) and related defined contribution programs to federal policymakers and makes practical assistance with profit sharing and 401(k) plan design, administration, investment, compliance and communication available to its members. PSCA, established in 1947, is based on the principle that “defined contribution partnership in the workplace fits today’s reality.” PSCA's services are tailored to meet the needs of both large and small companies with members ranging in size from Fortune 100 firms to small, entrepreneurial businesses.