With all the options out there, why is a 401k such a popular retirement plan option? This is a good question that really points out the many benefits of these accounts. They’re easy to set up and maintain, they have tax benefits, and perhaps most importantly is the contribution match from your employer.
A 401k is set up through your employer. They hire a company that will handle the account and things are mostly taken care of for you. Your employer sets up a couple of different plans for you to choose from that will invest your money in bonds, stocks, money market accounts, and other investment opportunities. The plans will usually vary from the amount of risk you’re looking to take–some will offer lower risk and lower returns, while others will have more risk but higher returns. Over the years you have the option of reviewing your choices and making adjustments as you deem necessary.
The contributions to the account are taken from your income before taxes are taken out. You decide how much of your income you would like to invest. This happens automatically and doesn’t require anything from you.
Because your contributions are taken out of your income before taxes are taken out this will lower your income level as far as the federal government is concerned, which may lower the tax bracket you fall into, lowering the percentage of your income that is owed for taxes. You will be paying taxes on this income when you reach retirement age and make withdrawals, but hopefully your income level will be lower at that time and you’ll owe less money.
The biggest benefit from a 401k plan is your employers match. Many employers will offer to match your contribution up to a certain percentage of your income. So if you contribute three percent of your income to your 401k, they will also contribute that amount. This may seem like a small amount of money but over time (and with that money being invested and earning returns) it really ads up and helps you grow a respectable nest egg.
With all of these benefits it’s easy to see why a 401k is such a popular retirement plan option.
