Retirement Read Time: 5 min

Why You Should Invest in Your 401(k)

Even if retirement isn’t in your immediate future, saving and investing now can help you live comfortably after you’re done working. One of your most impactful opportunities to save, and even earn, over time is by investing in your 401(k). You may be familiar with some of the benefits, from employer contributions to reduced taxes. But did you also know that your savings can compound over time, generating even more income for retirement?

If you like the sound of “automated savings” that can help you live the retirement lifestyle you deserve, then here are five more reasons to contribute to your 401(k):

1. 401(k) Contributions Are “Before Tax” Money

With a traditional 401(k), your contributions are deducted from your gross income. In other words, any tax-deductible contributions are removed from your paycheck before taxes. Taxes aren't deducted from your contributions or any investment earnings from that account until you withdraw the money.

2. When You Finally Pay Taxes on Your 401(k), It May Be at a Lower Rate

A 401(k) can have significant tax advantages. Here's why. Your retirement contributions are deducted from each paycheck pre-tax. Since traditional 401(k) contributions are made before taxes, they don't count toward your taxable income, which means your tax burden for the year will be lower.

Although you’ll pay taxes on the income you withdraw from your traditional 401(k) later on, there’s a good chance you’ll be in a lower tax bracket once you’re retired and begin making withdrawals. If you have a Roth 401(k), however, you’ll contribute post-tax money to your account, which means your retirement withdrawals are tax-free.

3. Your Employer May Contribute to Your Retirement Plan

One of the biggest advantages of an employer-based 401(k) is that it’s an easy way to start saving for retirement. Not only are your contributions automatically deducted from your paycheck, but your employer may also choose to make matching contributions, up to a certain amount. Any contribution your employer makes is essentially extra savings from the company’s pocket.

Depending on the type of 401(k) you have (Roth or traditional), you'll owe taxes on funds before they're added to the account, or whenever you withdraw the funds from the account.

About 401(k) Contributions

A 401(k) is a defined contribution plan that allows you and your employer to make contributions up to a specific dollar amount set by the IRS. This contribution limit changes annually to account for inflation, and the limit is higher for certain age groups. When planning your contributions, be sure to check the latest limits set for your age group.

One of the best ways to get the most out of your 401(k) is to maximize your contributions, meaning you contribute the maximum amount permitted. If your company offers matching contributions, you may want to consider taking full advantage of this added benefit.

Beyond annual contributions to your account from yourself and your employer, you can also earn a rate of return on the money in your account. The more time your contributions remain in your 401(k) account, the greater earning potential they may have.

4. Assets Protected From Creditors

In the event of bankruptcy or issues with creditors, your 401(k) assets are generally safe due to the Employee Retirement Income Security Act (ERISA). Under federal law, any assets that are in your 401(k) are generally protected from claims by creditors. If you owe child support, alimony or back taxes, the IRS may be able to garnish your 401(k) money. However, since the account legally belongs to your employer until you start to withdraw money for income, you have some protection from federal tax liens.

5. You Can Compound Your Money

How does simple savings sound? In the financial world, a compounding 401(k) is about as close as it gets to making money easily. Compound interest refers to interest that's calculated on the initial amount of your deposit or loan, in addition to interest that accumulates on that amount. Depending on your plan's policy, interest is often compounded on a daily, monthly, quarterly, or annual basis.

This material was developed and prepared by a third party for use by your Registered Representative. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The content is developed from sources believed to be providing accurate information.

 

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