Chances are that you have heard about various 401(k) benefits by now, but you might not understand exactly how a company-sponsored retirement plan can help build your financial future. We might suggest that the more you know about 401(k)s, the more you will be able to take advantage of those 401(k) benefits.
Recent estimates indicate that more than 80 million workers actively participate in company-sponsored retirement plans around the country, so you may already be participating in a 401(k). Let us give you four good reasons for you to fall in love with it:
- The amount that you contribute to your 401(k) is tax deductible. Contributions to a traditional 401(k) are taken directly out of your paycheck before federal income taxes are withheld. This pre-tax withdrawal lowers your total taxable income which means you might owe less in income taxes, regardless of whether you itemize or take the standard deduction.
- Plan earnings are tax deferred, which can accelerate your gains later on. Dividends and capital gains that accumulate inside your 401(k) are not subject to tax until you begin withdrawals. The tax treatment can be a significant benefit if you’re in a lower tax bracket in retirement.
- Your employer could be contributing to your plan. Many employers offer to match the amount you contribute to your 401(k) plan. If your company offers a 401(k) match feature, sign up as soon as you can — it essentially represents free money.
- Your money goes straight from your paycheck to your retirement account. With a 401(k), you can make automatic contributions directly from your paycheck. Since the deduction is taken before you get paid, you’ll be less likely to miss the money.