What Are The Benefits Of A 401(k)?
So what are the benefits of a 401(k)? If you work for any company in the United States that has at least 10-20 employees, you probably heard of the phrase 401(k).
401(k) is a great idea when it comes to planning your retirement, you can set up a 401(k) and put in periodic contributions. The great thing about a 401(k) is that the amount of money you put into your account isn't taxed upfront.
Uncle Sam doesn't take a chunk of your money like it normally would your regular paycheck. So in a very real sense, 401(k) is a form of sheltering a part of your paycheck against taxes. But wait, there's more good news. Not only do you get a tax-deferred way to save on taxes currently, but your employer matches a certain portion of your 401(k) contributions. This is basically free retirement money that your employer is contributing.
The US Congress established the 401(k) program to help Americans save for retirement. If you play your cards right, you're basically letting the US Government subsidize your retirement planning. How awesome is that? Also, depending on the particular 401(k) plan that you join, you can get pretty good returns on the amount of money you invested.
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Keep An Eye On Tax Advantages
In the United States, in most other legal jurisdictions, the amount of tax charged to you is based on how much adjusted income you have. Adjusted income is the amount of income you have and how much income you take minus your costs. The great thing about 401(K) accounts is that the amount of money you put in a 401(k) up to a certain legal limit can be deducted off your income. This is good news. Because the lower your income, the less taxes you pay.
Since 401(k) contributions effectively reduce your income for tax purposes, you pay fewer taxes. You benefit immediately by having to pay less taxes. In fact, if you position your 401(k) properly, it can reduce your tax bracket so you qualify for a lower tax rate. There is a disadvantage to this however, you cannot just take money out of your 401(k). If you do that, you will incur a penalty and you will lose tax advantages.
The whole point of the 401(k) is for you to pull your money so that once you reach a certain age, you can pull that money out and then pay tax only up until that time. This is a tax deferment. It's not a complete tax avoidance or tax elimination. No such animal exists. Another downside to a 401(k) is that you have to wait up until you're a certain age, only then can you withdraw without tax penalties.
Most Employers Match The Funds An Employee Deposits: Watch For Limits
It's so easy to get caught up to the fact that, if you open a 401(k) account with your employer, you can park a lot of your income into this account, this much is true. But the downside is you can't get too carried away with it.
You have to remember, your employer is only legally obligated to match your contributions up to a certain amount. Once you go pass that amount, the amount of money you put into your account is unmatched by your employer. You should not be discouraged by this limitation however. In fact, you should still put money into your 401(k) on an automatic basis, even if you passed that employer matching amount. Why? This is a form of forced savings. And the reality is that, if you don't see money coming into your paycheck, you would think that it doesn't exist and you don't miss it.
Accordingly, you will end up building up your 401(k) sooner, rather than later. Compare this situation where you wait for the money to hit your paycheck, and you then cash a paycheck, and then you use those funds to deposit it into your 401(k). You become psychologically attached to the amount of cash you are investing in your 401(k) and might be tough to let go of that money emotionally. You might think you might have spent that money somewhere else. In a very real sense, it is much better to not see that contribution in the first place so you don't form an emotional attachment.
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Automatic Enrollment By Most Employers
Another key point that you need to keep in mind is that most employers will automatically enroll you in a 401(k) unless you opt out. For most employees, this is a lot of problem. In fact for most employees, this is a very welcome situation. This one of the great benefits of a 401(k) is that it can start benefiting you even if you don't actively seek it out. The downside to this is that, if you already have your own retirement provisions.
You are already saving up money in another way; the 401(k) might be a bit redundant or it could be a duplicate of your efforts. Keep that in mind, it may be a good idea to opt out depending on your situation however considering the amount of benefits the 401(k) brings to the table, opting out should not be your first priority. you should only take this course of action if you are extremely sure that whatever investment alternatives you have laid out will not just match but also exceed whatever benefits that the 401(k) you're going to opt out of.
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Roll Over Options
Keep in mind that if your employer is facing a bankruptcy or is going out of business, you need to roll over your 401(k) gold benefits. While it is relatively rare that the employer will go down in flames and take your 401(k) with it, it's better to be safe, than sorry. Always have the option of a 401(k) roll over so that you can enjoy the benefits of a 401(k) in the case your employer goes belly up.
A 401(k) account benefits American employees in many different ways. It gives you peace of mind. It gives you the resources you need to plan a comfortable retirement. Also it forces you to save. There are just so many benefits of a 401(k). The biggest benefit of course is forced saving. Too many Americans spend money that they don't have. By automatically enrolling and funding a 401(k), you increases your chances of reaping its benefits.
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