Achieving your retirement dreams won’t happen by accident. You have to plan and save for the future, and businesses understand this. Therefore, many employers off their employees the opportunity to set up 401(k) plans. Setting aside any amount of money will grow to help you in the long run. Here are the top benefits of contributing to a 401(k).
Take It With You
You can take the 401(k) with you when you change jobs or careers. The money you contributed during your time with the company belongs to you. Find out from your previous employer what your choices are for moving it somewhere else or leaving it where it’s at. They’ll provide you with different options to choose which is best.
You Have Control
You’re in control regarding how much you contribute to your 401(k). However, this amount is subject to the plan type and IRS limits. Nevertheless, another great benefit of 401(k) contributions is that you can change the contribution amount anytime. If you are going through a rough financial spot, you can decrease the amount. Likewise, the opposite is true if you have more disposable income. It all depends on your situation.
Traditional 401(k) plans take money directly out of your paycheck before withholding any federal income taxes. This action lowers your taxable income, meaning you may owe less in income taxes, whether or not you take a standard or itemized deduction. Essentially, you could end up in a lower tax bracket.
These pre-tax contributions become tax-deferred until you withdraw the funds during retirement. Many people choose the traditional 401(k) plan because they plan to be in a lower tax bracket at retirement than they would be throughout their careers.
However, one of the things to know about 401(k) plans is that there are two types: traditional and Roth. With a Roth 401(k), all the money you contribute to your account has already been taxed. Therefore, when you pull the funds out during retirement, you don’t have to pay any taxes on it—even on any applicable investment dividends.
You Have Time on Your Side
You can save more money the earlier you begin contributing. This is because compound interest is a significant advantage of investing in your 401(k). What is compound interest? It’s when you earn interest on the principal amount plus accumulated interest. In simple terms: you’re earning interest on top of interest. It’s an incredibly powerful ally for every person trying to save for retirement.
So what are you waiting for? It’s time to set up that 401(k) plan with your employer and begin saving for retirement. You’ll be pleased with the financial and emotional security a 401(k), whether traditional or Roth, can offer.