401(k) Plan
Your future is waiting, so prepare for it.
401(k) Plan Basics
With Americans living longer and spending more years in retirement, it is paramount to financially prepare for the golden years. Your employer’s 401(k) plan provides a great opportunity to help you prepare for a brighter financial future.
What's a 401(k) plan?
A 401(k) plan is an employer-sponsored retirement plan that allows an employee to divert a portion of his or her salary into long-term investments. The employer may, but not required to, match the employee’s contribution up to a limit. Generally, C Corporation, S Corporation, partnership, sole proprietors, and self-employed can set up a 401(k) plan.
401(k) plan benefits
Compared to other savings vehicles available to private sector employees, the 401(k) plan can be advantageous in many ways. Here are our top nine (9) reasons why you should join your plan.
Top Three: Saving Made Easy
1. It’s so easy even a cave man can do it. You choose a dollar amount or a percentage of your salary you want to save, and your employer automatically deducts your contributions every time you are paid. Your savings is then deposited into a unique account within the plan under your name. You don’t need to remind yourself to write a check.
2. You get free money with an employer match. To encourage employees to take part in their retirement plan, over 70 percent of plans offered some kind of matching. If your employer offers match, don’t pass up this freebie.
3. You get two tax breaks when you save in a 401(k) plan. First, your pre-tax contributions are tax-deductible. The money you contribute doesn’t count toward your gross income for the year, lowering your taxable income. Second, savings grow tax-free until you withdraw the money. You never pay taxes on contributions, dividends and capital gains within your 401(k) account.
Two More: Good Strategies
4. It’s so easy even a cave man can do it. You choose a dollar amount or a percentage of your salary you want to save, and your employer automatically deducts your contributions every time you are paid. Your savings is then deposited into a unique account within the plan under your name. You don’t need to remind yourself to write a check.
5. You get free money with an employer match. To encourage employees to take part in their retirement plan, over 70 percent of plans offered some kind of matching. If your employer offers match, don’t pass up this freebie
6. You get two tax breaks when you save in a 401(k) plan. First, your pre-tax contributions are tax-deductible. The money you contribute doesn’t count toward your gross income for the year, lowering your taxable income. Second, savings grow tax-free until you withdraw the money. You never pay taxes on contributions, dividends and capital gains within your 401(k) account.
Final Three: Building An Account
7. Withdrawal flexibility. Loans and hardship withdrawals may let you withdraw money in an emergency. Many plans allow loans (which you pay back) or hardship withdrawals (which you don’t) as a way of getting your money out in an emergency. However, because this money is intended to be for retirement, early withdrawal comes with a big set of attached strings. It’s prudent to weight all other options first.
8. If you leave your job, you can roll over your account into your new employer’s plan (if they allow it) or into an IRA. In either case, your account stays tax deferred.
9. Social Security likely won’t be sufficient. It’s generally acknowledged that Social Security is only intended to provide a small percentage of your retirement income. Financial planners generally indicate that an individual will need between 70 percent and 90 percent of his pre-retirement income to live comfortably in the golden years. Where is that money going to come from? A 401(k) plan can be a great source7
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.