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.
In today’s competitive marketplace, most employers offer 401(k) plans to help their employees plan for retirement. In fact, many offer two different options: the Traditional 401(k) plan, and its close cousin the Roth 401(k).
There are several reasons why an employer-sponsored 401(k) plan is such a popular way to save for retirement, not least of which that it is funded with pre-tax money and grows tax deferred. But just as important to a plan’s success is how contributions are invested.
Believe it or not, it’s the Internal Revenue Service that determines those limits, and it does so on an annual basis. The IRS actually reviews and sometimes adjusts the maximum contribution limits for 401(k) plans, IRAs, and other retirement savings vehicles each year, usually in November.
Beyond starting your 401(k) as early as you can, nothing's more important to its long-term success than how much you contribute. If you can’t make a large contribution, at least start with an amount to get the free matching and raise the amount every year in line with your pay raise if you can.
401(k) plans were created a little more than 40 years ago, when Congress passed the Revenue Act of 1978. Included in the Act was a new section in the Internal Revenue Code – Section 401(k) – that allowed employees to avoid paying taxes on contributions to their retirement savings from salaries, bonuses, and other forms of compensation.