What are the benefits of a 401k plan? Saving money can seem like an unfavorable chore to some now, but you will thank yourself for investing into your retirement later. This is where a 401k Plan can save you a lot of hassle.
A 401k (named for the tax code that governs it) is a retirement savings plan in which a portion of your paycheck is dedicated to a mutual fund portfolio of stocks, bonds, and investments.
As pension plans have increasingly become costly and difficult, 401ks have become the “cornerstone of employer provided employment benefits,” according to the Bureau of Labor Statistics.
A 401k plan gives you control of your future
One of the main differences between a 401k and a pension plan is that your individual plan is invested according to your controls, unlike pension plans which are invested in bulk. This makes a 401k more personal and flexible, and could lead to higher returns, depending on your investment strategy. You have more choices, which is an attractive feature at any time of life.
Most 401ks come with an employer match, usually up to some small percentage of your income (3% is typical). So, you’re receiving free (but delayed) money for your retirement. Its important to save at an early age, so investing into your 401k as soon as you’re eligible with your employer is a smart decision. This year, most employees can contribute up to $18,500 of their paychecks annually into their 401k with their employer.
Investing into your 401k has tax benefits
The cash you contribute to your 401k account isn’t taxed. The money is taxed, however, after you retire and draw on the 401k for income. What’s the advantage here? You’ll likely be in a lower tax bracket once you retire, so you’ll actually have to pay far less in taxes. According to Forbes, this is the number one advantage of a 401k and the real reason it’s such a popular retirement savings option.
A person can’t tap into their 401k until they turn 59 ½ years of age. If one receives money from this investment prior to this age they will be charged an additional 10% tax on the distribution. Don’t cause yourself any fees or penalties by withdrawing prematurely.
Once you land your dream career start putting a percentage of your pay into your retirement. In the moment I’m sure you want to use all your hard-earned money on your payday but be aware that your 59 ½ year old self will look back and thank you for your investment into your well-deserved retirement.