IndyMac Bancorp—once the nation’s 10th largest mortgage lender—has gone belly-up, leaving approximately 10,000 uninsured depositors high and dry. These guys will be lucky to recover 50% of their uninsured money. What can we learn about managing your money from the IndyMac failure? Continued

Stephanie asks: I recently started a new job that will not match 401(k) contributions until I complete one year of service. Should I still contribute prior to being eligible for matching? Continued

As the economy hiccups, more workers are turning to 401(k) loans for emergency cash. According to a recent study by the Transamerica Center for Retirement Studies, 18% of U.S. workers took a 401(k) loan last year. That’s an increase from 11% in 2006. Taking a loan from your 401(k) account is not difficult, but it’s not a good idea. Continued

“Trader” by killthebird.

You don’t have to be a math whiz – or a millionaire – to invest in the stock market.

In fact, the sooner you get comfortable buying and selling stock (and start investing in some solid companies), the better you can leverage stocks in your portfolio as your net worth grows.

Here’s an explanation of the three most common trading methods new investors should understand. Continued

I have written a lot about the importance of contributing to a 401(k) or IRA on this site, but rarely about how you should invest that money. Truth is, getting money out of your paycheck and into investments is only half the fight. Now it’s time for the second round: As a twenty something investor, how should you allocate your funds? Continued

You might wonder what Starbucks closing 7,100 stores tonight has to do with personal finance, other than the fact it might save you $4 if you happen to crave a latte this evening. Well, if you own Starbucks stock, you might be optimistic CEO Howard Schultz’s plan to reeducate 135,000 Starbucks employees on “espresso excellence,” among other topics, might reverse the stock’s recent downward spiral.

As a former Starbucks employee, however, I am personally interested in how the company is trying to return to its roots. For the uninitiated, those roots are more than just selling premium coffee and espresso. What made Starbucks so great was the focus the corporation put on being a great place to work. Continued

Retirement plans aside, not everybody is fortunate enough to begin investing in their twenties. Paying back credit card debt, establishing an emergency fund, and saving for home ownership all take priority over building a stock portfolio.

But if you can start investing, you certainly should. So how do you know when to start? Here is run-down of what the financial priorities in your twenties should look like.

Start with Retirement

Even if you haven’t tackled all of your other financial priorities, think about saving for retirement right away either through your employer-sponsored retirement plan (401k) or an individual retirement account (IRA).

Even if it’s just $200 a year into an IRA, it’s important to get in the habit of setting aside part of your income for the distant future and you won’t have to pay federal income taxes on your contributions.

If you haven’t already, start saving for retirement now.

Pay Off Credit Card Debt

Even in its best years, you won’t earn a return in the stock market that can surpass credit card interest rates. So tally up what you owe, take a deep breath, and knock out that ugly debt.

If you need a hand, our seven steps out of debt series can help.

Get an Emergency Fund

Unlike cash in short-term savings accounts, investments aren’t always liquid, meaning you might not be able to use the assets you have invested in emergencies like if you loose your job or face medical expenses.

Once your debts are paid off, concentrate on building an emergency fund equal to at least three months of your income. In time you will want to grow this to about six months, but three months is a good start.

With high interest rates and access to your money in about 2-3 business days, an online savings account like those from ING Direct is perfect for achieving this goal.

Keep Saving, Start Investing

Once you have an emergency fund established it’s time to start investing!

At first you won’t want to be quite as aggressive with how much you invest as you have been with paying off debt and saving.

Keep saving for upcoming expenses like your home, vacations, cars, even weddings.

Your investing priority should be retirement, and you’ll want to exhaust the ways you can save for retirement before turning to the general stock market.

IRS-set contribution limits in 2007 are $15500 for 401(k)s and $4,000 for traditional IRAs (note that if you max out your 401k, however, your IRA contribution won’t be tax-deductible).

If reach your retirement contribution maximums and are rearing to keep going, congratulations! Then it’s time to start considering buying some securities with an online brokerage.

What About Student Loans?

In most cases, it’s wise to start investing even if your student loans aren’t fully paid-off. Student loans generally have long terms but at fairly reasonable interest rates thanks to federal subsidies. With some aggressive investing you make more than you’re paying on student loans.

You know the importance of saving for retirement early, and perhaps you know that money you put into a 401k or IRA in your twenties is more valuable than money you contribute down the road. But how much should you have saved for retirement before turning 30? Continued

For many young workers with Fidelity Investments 401k retirement plans, the automatic and often recommended investment choice is the Fidelity Freedom 2040 Fund, a generic mix of large growth domestic and international stocks pre-packaged for the aggressive, long-term investment strategy of somebody aiming to retire around 2040.

While Fidelity Freedom 2040 is not a bad fund (Morningstar gives it three stars and sees strong governance), the International Discovery Fund, currently available to many Fidelity 401k retirement plan participants, is a stalwart choice that should not be overlooked by investors under 30 as an alternative to Fidelity’s cookie cutter suggestion.

The International Discovery Fund boasts a 17.30% 5-year return and beat its peers by over 3%. With numerous energy holdings and a large stake in successful Japanese automaker Toyota, the fund displays an encouraging balance of opportunity and stability.

Perhaps the only pock mark on the International Discovery Fund is its popularity. With just under $7.5 billion in assets under management, some analysts worry if the fund’s strategy can withstand the volume. Don’t be surprised if the fund closes to new investors like its sister fund, Fidelity Diversified International.

Your 401k Retirement Plan: What is a 401k?

A 401k retirement plan is, very basically, an investment account funded by direct withdrawals (called “deferrals”) from your paycheck. The largest benefit of a 401k is you do not pay any federal taxes on the money you save, or earn in interest, until you make a withdrawal.

While 401k retirement plans are sponsored by your employer and managed by a third party (Fidelity Investments, for example), a 401k is a self-directed account. You control how much (if any) money you want to contribute to your 401k and your employer automatically takes that money out of your paycheck to deposit in your plan. Your employer may match a certain percentage of the money you contribute to the plan, up to a limit, or may make regular contributions based on your salary whether or not you contribute your own earnings.

Why Contribute to a 401k?

Just 50 years ago, any decent job offered a pension that guaranteed a percentage of your salary (based upon years of service) between your retirement and the day you died. On top of Social Security, which provided a similar benefit to everybody, most hard-workers could look forward to a relatively comfortable retirement without a second thought. Today, this simply isn’t the case.

Pension plans worked when the average retiree lived for just five or ten more years. Fortunately for us, we live a lot longer today. Unfortunately for employers offering pensions (and employees counting on them), those funds have been eaten up by current retirees. Even more frightening, the federal government has acknowledged the same thing will happen to Social Security. To those working today this is a double slap in the face. While existing retirees’ benefits are coming out of our paychecks each month, the likelihood we will receive similar benefits when we retire is dwindling.

With disappearing pension plans and the erosion of Social Security, young workers have two options: work until you die or save for retirement yourself. For most, a 401k retirement plan is the best choice. Why?

Benefits of a 401k Retirement Plan

401k plans offer a number of benefits that you would not get through just any investment account. They include:

Tax Deferred Savings - Your 401k account is not subject to federal taxes until you make a withdrawal. That means that your investments grow tax-free for decades. The catch? If you withdraw from your account before retirement the IRS will hit you up for its share – up to 28% plus a 10% early withdrawal penalty if you withdraw before 59 1/2. There are limited exceptions for 401k hardship withdrawals and 401k loans.

Employer Matching - Though not mandatory, most employers provide some sort of matching contribution or profit-sharing contribution to your 401k plan. When paired with a regular employee contribution, such contributions can effectively increase your salary by several thousand dollars a year.

Large Deferral Limits - As of 2006 the IRS allows employees to defer up to $15,000 or 100% of earnings, whichever is less, into a 401k. Participants age 50 and over can also make “catch-up” contributions up to an additional $5,000 in 2006.

401k Rollovers - Thanks to the 401k rollover; a 401k retirement plan is highly portable. As it is unlikely you will work for one employer throughout your career, it is possible to “rollover” your 401k into a new company’s plan or an Individual Retirement Account (IRA) without incurring any tax penalties.

401k Retirement Plans: Summary

There is no reason not to take advantage of a 401k retirement plan if your company offers one. Read more on Money Under 30 to learn why you must start saving early, learn about unvested money, or use a 401k calculator to determine how much you need to save.

Related Posts

• How to Take a 401(k) Loan - And Why You Shouldn’t
• How Much Should Be In Your 401(k) at Thirty?
• 401(k) Vesting and Changing Jobs: Should You Stay or Should You Go?