It is definitely a good idea to take advantage of your employer's 401(k) plan as it gives you an instant raise ("free money") in saving for your retirement. Depending on how generous your company is, they will match anywhere from 2 to 10% of your contribution at 50 cents on the dollar. So for example if you contribute 2% of your gross salary each pay period (approx. $50), they will kick in an extra $25. Ask your HR Department for all the particulars, especially when company contributed funds become fully vested to you. If you leave the company before you become vested - anywhere from 1 year to as long as 5 years - the company can take their contributions to your 401(k) back. Anything you contribute is yours to take, even if you leave your job, and you will incur no tax penalties as long as you transfer the funds to another 401(k) plan or personal IRA plan. But, you can always leave the funds at your old employer, if they don't make you transfer it.

Yes. A 401K plan gives you many tax advantages that you would not otherwise have for your investments. If your company has a pension plan, you will not be eligible for tax breaks available in an traditional IRA. The 401(k) would then be one of the only tax free retirement investments you could make. (Whole life insurance is another, but that is an expensive route to take). If your company offers a contribution match, taking that money is almost a no brainer.

You really should review the plan very carefully, however. My plan offers me a variety of choices so that I can build a balanced and diversified portfolio of equity, bonds, cash, real estate, and within equity, I have options of foreign as well as U.S. stocks. Some plans offer very few choices and the choices can be expensive. Some also offer incentives to purchase company stock - which is not recommended.

The number one factor in determining future mutual fund return is expenses. The more expenses the mutual fund charges, the lower the return in the long run. If your plan is full of options that charge 2.0% or higher in annual expenses, you might be better off contributing to the max employer contribution and putting the remainder in a fund of your own choosing in a traditional or Roth IRA.

I would also consider using a traditional or roth IRA for classes of investments that might not be offered in your 401(k) plan so that your portfolio remains diversified. For example, if your 401(k) plan offers only equities, it makes sense to go outside the plan if you can for bond exposure.

All that said, the earlier you begin investing, the greater the potential value of your retirement plan when you reach retirement. However, it does not pay to make any investments if you are currently running a deficit each month in your personal account. Don't run yourself into debt to pay for retirement. You need to pay your rent first since once that money is in the plan, it is difficult to access it to pay monthly expenses.

Hope that helps.

The answer is almost always yes.

The US tax laws are heavily in favor of individuals investing in this way (just they favor home ownership). You don't have to pay taxes initially on the money you invest, at a time when your tax burden is high (because you have a job). Your company will probably match what you invest to some degree, because most other companies do so and they want to be competitive. Your funds will grow without having to pay any taxes on them as they do. Finally, when you do take out the money, the taxes you will pay will probably be much lower than they would be now (because you'll be retired and in a much lower tax bracket).

The primary downside is that you can't use the money until you're 59.5 without incurring a 10% penalty -- except IRS code 72(t) lets you get around that if you need to take money out periodically before you turn 59.5.

I have a Google Spreadsheet (I'm not selling anything) that shows how contributing 10% to your 401k, with a 3% company match, and owning your own home add up to 100 times your starting salary over the course of your career. It's very simple to become wealthy if you just start planning early enough.

http://spreadsheets.google.com/ccc?key=pM5gD3nfiF9 wnLfQm97FQIQ

Good luck,

Doug