With so many retirement options available, it can be difficult determining which plan makes best financial sense to you and your family. Today, we’re helping you sort through the confusion to decipher your employer’s 401(k) plan. Should you utilize your employer’s 401(k) retirement plan? In short, the answer is a resounding: YES.
We will get to the specifics on why a 401(k) plan is an especially great way to save for retirement below. For now, know that a 401(k) plan is like a golden unicorn in today’s volatile market; many employers simply don’t offer benefits like 401(k) plans anymore, so if yours does, be sure to take advantage of it.
Tax Benefits
Yes, you should enroll in your employer’s 401(k) retirement savings plan. One of the most beneficial reasons is your pre-tax contributions are not taxed as current income. The amount you contribute to your 401(k) comes right off the top of your salary before taxes are taken out. This reduces your salary and lowers your taxable income at the end of the year.
Now, Uncle Sam will eventually tax you on this money, know that to be sure. You’ll eventually pay taxes on the contributions when you withdraw money from the plan, ideally at retirement age of 59½ to avoid paying an early penalty withdrawal of 10%. However, at this point in your life you’ll likely be in a lower tax bracket and will be taxed at a lower rate and/or may even qualify for tax reduction credits. Additionally, the money you contribute to your 401(k) grows tax deferred and, depending on market performance, may grow to a considerable balance.
Employer Contributions
Companies offering 401(k) retirement plans often include matching contributions up to a set limit. For example, for every dollar you invest, the company may match your investment up to a certain amount – say $.50 up to 6 percent of your salary. These matching contributions are also pre tax dollars.
Employers may place restrictions on plans called ‘vesting’, this limitation aligns full-matching entitlement with the number of years an employee has been with a company. For example, employers may require employees to be with a company five years before becoming “fully vested” or having the full entitlement to matching funds. If an employee were to leave before the five year mark, he or she might only receive a percentage of the matching funds.
Every 401(k) plan has it’s own specific plan details so be sure to check your specific offerings.
Loans Against Your 401K Plan
Lastly, 401(k) retirement plans may allow enrolled employees to take a loan against his or her plan. Instead of working with banks or credit unions to get a loan (i.e. being at the mercy of the lender and the current market interest rate), employees are able to take a loan against their 401(k) plan, often at a more reasonable interest rate than current market rates. Most repayment terms require loans against 401(k) plans to be repaid within five years to avoid any penalties; if you end up leaving your job, the loan may require immediate repayment.
In summary, YES, enroll in your employer’s 401(k) retirement savings plan.
