401(k) and 403(b) Retirement Plans - kcentv.com - KCEN HD - Waco, Temple, and Killeen

Tell us a little about the basics of these retirement plans.

401(k)s and 403(b)s are retirement investment accounts offered through employers that receive favorable tax treatment. Employees can make "salary reduction contributions" that are taken directly from their paycheck, and employers usually offer "matching contributions" based on the amount you contribute.

In 2010, you can contribute up to $16,500 to these plans; or up to $22,000 if you're 50 or older. And employer matches are on top of these amounts.

What can you tell us about the tax breaks that 401(k) and 403(b) plans offer?

Most 401(k) and 403(b) contributions are tax-deductible when made, but withdrawals are taxed as income in retirement, although some 401(k)s and 403(b)s offer "Roth" type contributions that don't reduce your taxes now but can provide tax-free income in retirement. Regardless of the type of contribution made, the account balance grows tax-free while in the account, helping you accumulate more over time than you would in a taxable investment.

So how should viewers make the most of their employer-sponsored retirement plan?

Start contributing. Even if you're only able to contribute 1 or 2% of your salary, that's better than nothing.

Contribute enough to get the maximum employer match. Turning down "free money" is always a bad idea.

Increase your contribution over time. Most people don't miss money taken directly from their paycheck; so it's a good idea to gradually increase your contribution, especially after receiving a raise.

401(k)s and 403(b)s are retirement accounts. Avoid taking loans from your account balance, don't cash out your account when you change employers, and remember that most withdrawals made before age 59½ are subject to taxes and a 10% penalty.

Remember that these topics are general in nature, so consult with your financial advisor about your specific situation before making any investment decisions.