What if you were told that you could invest in a savings plan at work where each dollar you put into it is taken off the top? Or, the amount of your contribution will lower the amount you pay in yearly income tax? You need to understand the ins and outs of 401k retirement plans!
Also, every dollar and cent you fund the account with will grow tax-deferred. Not only that, each of your 401k retirement plan contributions will make it possible for your employer to match those amounts as well.
Easy Way to Save Without Thinking About It
You certainly wouldn’t say “no” to such an opportunity, would you? Of course not, at least not if you want to enjoy your days fishing, playing golf or volunteering your services when you retire. What is nice about a 401k retirement plan account is that every single dollar you put into the plan is put to use.
For example, say you draw a salary of $800 per week. If you invest, for example, 2% of your income, $16.00 will be spread across a broad range of investments of your choosing. You do not even have to think about your contributions as the money is automatically withdrawn from your paycheck.
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The Magic of Tax-Deferred Savings
The major advantage of a 401k account though is that is comprised solely of pretax money. Therefore, say, you make $8,400 per year and fall under a 15% income tax bracket, each dollar invested into your account reduces your tax amount by 15 cents.
Or, for example, if you make $172,000 per year and fall in with the individuals who are in the 33% tax bracket, then each taxable dollar that goes into a 401k is reduced by 33 cents.
Dollar Based Investment
If you only invest $600 per year or $50 per month and fall into the lowest tax bracket of 10%, it is the same as investing the equivalent of $660 in after-tax dollars.
Therefore, regardless of your salary, dollar for dollar, most people are typically wise to take advantage of 401k retirement plans if it is offered to them at work. If you work in a non-profit organization, then a 403(b) plan is the “401k” option for you.
Benefits Of 401k Retirement Plans For Investors
What makes 401k retirement plans or similar retirement accounts so appealing is that it offers investors a way to invest that is realizable. Therefore, they do not have to worry about going through a broker or middleman, and can open an account for a minimal amount of money that will also lower the amount in taxes they pay.
In a rocky market, a 401k retirement plan is an ideal investment choice to make. Put your hard-earned cash into a 401k retirement plan versus placing a pittance in the account and allocating the lion’s share of your money into other investments.
Of course, the 401k retirement plans should have a good selection of investment options. Equity categories represented should include small-cap, mid-cap, and large-cap stocks as well bond classes, international, growth, balanced and income-based offerings. If you feel your 401k does not offer good choices, then make your voice heard to the administrator of the account.
Photo Source: Flickr – amagill