What Are The Benefits Of Investing In A 401k Retirement Plan?
- Your 401k contributions grow tax-deferred up until you withdraw them (upon retirement)
. This means your dollars grow quicker and tax-deferred. The net effect is that you will have more real dollars working for you.
- You have full control over your retirement savings. You can choose to invest in stocks, bonds, short term money market instruments, etc. This is unlike a pension plan where you are limited in choosing what type of investments best suit you.
- Your yearly current gross income is lesser by the amount of contributions you make. For example, if you earn $50,000 a year and contribute $15000 a year into a 401k retirement plan, your current yearly gross income is $35000. Therefore, you have a current taxable income of $35000 and not $50,000.
- You therefore fall in a lower tax bracket and pay less taxes each year. This means with the power of compounding interest, you have more money working for you in a 401k retirement account.
- 401k retirement plans are portable. This means if you switch jobs and work for a new employer, you can rollover your past 401k plan into an IRA (Individual Retirement Account) or into your new employer's 401k administration system. You can also withdraw money.
Note: If you withdraw money from a 401k or an IRA before the age of 59.5, you will be subject to pay taxes on the withdrawal and pay an early-withdrawal penalty fee of 10%.
- If your 401k contributions are deducted automatically from your paycheck, you do not have any administration costs (time and money).
- Your employer can also match-up your contributions by a certain percentage. For example, your employer can add an extra 50% of the amount you originally deposit into a 401k plan. For example if you allocate $10,000 a year into a 401k account, your employer will match-up by (50% x $10,000 = $5000). Your total contributions will therefore be:
$10,000 (your money) + $5000 (employer's money) = $15000
- You can also borrow money in the form of a loan from your 401k account. This "loan" is not subject to taxes and withdrawal penalties. You can pay back the loan automatically through payroll deductions and any loan interest that you pay, will also go back to your account.
by: trendsetter
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