It’s rather normal for companies to tell their new employees about all the benefits they provide, including a 401(k). A 401(k) plan is one of the best ways to invest in your retirement. This means, when you stop working, you won’t have to worry about how you will be able to financially support yourself. In order to live the retirement life you’ve always dreamt of, it is important that you start saving now. Even putting a small percentage aside can be rewarding in the long run. What exactly can a 401(k) do for you? We’re here to tell you all about it.
Overall Tax Rate is Lower
When you contribute or add to your 401(k), they are taken from your paycheck even before federal income taxes are applied. This means, in turn, it will lower total taxable income, therefore, you will owe less in income taxes. This is also possible if you itemize or take the standard deduction, it will work either way. It could possibly put you in a lower tax bracket, which ensures you will pay less in taxes! Overall, this ultimately means that you will most likely be in a lower tax bracket by the time you hit retirement.
Your Employer May Contribute to Your Retirement Plan
Most employers are willing to match a portion of your savings. If you don’t take this, it’s practically like passing up free money. A common match with most employees is 50% of the first 6% of pay you save. For example, if you have a salary of $35,000 and you contribute 6% of your pay to your plan, you would be contributing $2,100 and your employer could match you with an additional $1,050, which is half of your contributions. Even if your employer doesn’t match contributions, this is still the best way to save money for your retirement.
Loans May Be Offered
Even better, some 401(k) plans will allow you to borrow from your account for any reason you may deem necessary. It would be best to only take a loan out if it will be used towards a residence, education or medical expenses, or severe economic hardships. A loan from your 401(k) will usually require payback with interest and must be paid within five years. This might be exempt for specific loans. As long as you remain employed with the company that you have your plan with, you can pay back the loan without having to deal with income tax liability.
You Can Take it Wherever You Go
Even if you have started a 401(k) plan with a different company and are working with another company, the money still belongs to you and will go with you wherever you go. Mind you, you have to keep your plan active and in use in order to keep the contributions. Depending on the plan you have chosen, there are various ways in which you can keep your plan growing, even on a tax-deferred basis. If you are working with a new employer, it would be best to look into how you can transfer contributions and maintain them.
Compound Interest Can Have a Big Impact
One of the best advantages that 401(k) plans offer is contributing to compound interest. This interest works when you earn interest on the principal amount of investment in addition to any accumulated interest. In simpler terms, it’s earning interest on interest. Compounding has a rather great impact if you are investing for the long run. As we have said before, it may not seem like much now, but with compound interest, it can add up and help you in the end.
Ultimately, You Are In Control
What most people fail to understand is rather the most simple concept of a 401(k): you don’t lose anything by investing now. In fact, the plan is all about giving back to you. When you decide to take up a plan, you secure your future. If you want to be in full control of your future and your financial standing, contribute now.
Learn More About Sensible Investing with the Professionals at Clifford, Ross, Raudenbush, and Cooper
Our accounting firm is backed by years of providing the highest quality of tax and accounting services to customers in the El Paso and Las Cruces areas. Should you need any help or professional assistance with your finances, we couldn’t be happier to be there to support you. Contact us today to make an appointment.