Vail Valley: Put unused vacation days to work – in your 401(k) |

Vail Valley: Put unused vacation days to work – in your 401(k)

Charlie Wick and Tina DeWitt
Vail, CO Colorado

VAIL VALLEY, Colorado – Now that the year is almost over, you may want to explore some last-minute steps you can take to potentially boost your financial fortunes and improve your tax returns for 2010. And one good place to look is your 401(k).

Your 401(k) is a great retirement savings vehicle. You typically fund your plan with pretax dollars, so the more you put in, the lower your taxable income. Plus, your earnings can grow on a tax-deferred basis, which means your money can grow faster than if it were placed in an investment on which you paid taxes every year. Also, you can spread your 401(k) dollars among a range of investments to match your risk tolerance, time horizon and retirement goals. Clearly, then, it would be nice to max out on your plan each year. But during difficult economic times, it may not be easy for you to defer more of your salary into your 401(k).

Fortunately, there may be a way in which you can boost your 401(k) contributions – without cutting into your take-home pay.

Specifically, you may be able to convert any unused vacation and sick time to your 401(k) or other employer-sponsored retirement plan, such as a 457(b) or 403(b). Many employers have offered this conversion option for years, but relatively few employees have taken advantage of it.

Now, however, the Obama administration has asked the U.S. Departmentof the Treasury and the IRS to issue new rulings on the topic in the hope of getting more people to increase their retirement savings. And this is an important goal, because many of us still need to put away much more money on a regular basis if we’re going to enjoy the type of retirement lifestyle we’ve envisioned.

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The ability to convert vacation or sick time to your 401(k), 403(b) or 457(b) plan can help you make progress toward that lifestyle. While the conversion feature won’t enable you to exceed the contribution limit for your plan – which for 2009 is $16,500, or $22,000 if you’re 50 or older – it may make it easier for you to beef up your contributions for this year, particularly if you have unused vacation or sick time you can’t carry over.

Not all employers are willing or able to turn vacation or sick hours into retirement plan contributions, so check with your human resources or benefits office to see if you can make this move. If it is allowed, though, consider taking action. Once you know how many retirement plan dollars can result from your unused vacation or sick days, go over your 401(k) or other plan, perhaps with the help of your financial adviser, to determine an appropriate allocation of your money.

For example, you may have accounts within your plan that are currently under-funded. Or you might benefit from rebalancing your plan by adding some new money into different accounts. Keep in mind, however, that diversification does not guarantee a profit or protect against loss.

In any case, consider this opportunity to add to your retirement plan. The more you save today, the brighter your outlook could be for tomorrow.

Charlie Wick and Tina DeWitt are financial advisers with Edward Jones Investments. They can be reached in Eagle at 970-328-4959 or in Edwards at 970-926-1728.

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