It was just a few decades ago that most employees had a nice pension and a gold watch waiting for them when they turned 65. That’s no longer the case. Today, more employers offer a 401(k) plan or a similar defined contribution plan for their employees. Many people decry this shift, but there are some great features that come with 401(k) plans. Here are three that you should take into consideration before deciding not to participate.
401(k) Plans Allow You To Save On Taxes:
For every dollar you put into a 401(k) plan, you’ll save your marginal tax rate on that dollar. If your marginal tax rate puts you into the 12 percent tax bracket, you’ll actually only see 88 cents for every dollar you save taken out of your paycheck each pay period as long as you save on a pre-tax basis. If your tax rate is higher, the tax benefits get even better and could hit as much as 37 percent in 2018. Additionally, you don’t have to pay any taxes on the gains that you experience within your 401(k) until you decide to take the money out when it comes time to retire.
You Can Save Big Money:
Not only can you save money that would otherwise go to Uncle Sam, there are other benefits that come with saving in a 401(k) plan. Starting with the 2018 tax year, you can save up to $18,500. This number goes up periodically, depending upon the rate of inflation. This is money that you can shelter from taxes as noted above, and it can add up to a massive amount of money over the course of a working career. Additionally, if you are 50 years of age or older, you can save $6,000 more each year. This catch-up contribution would bring your total possible contribution to $24,500 for the year, and this amount will start to add up quickly.
Your Employer Might Add Funds:
One of the best aspects of saving in a 401(k) comes around for those who are lucky enough to have employers who throw in matching funds. This means that for every dollar that you put in up to a certain percentage of your pay, your employer puts in a specified amount. A common matching level is a 50 percent match for the first 6 percent of an employee’s pay. This means that you’d save $3,000 on an average $50,000 salary. Then your employer would kick in an additional $1,500. At this level, you’d effectively be saving 9 percent of your annual salary, which is getting pretty close to the 10 to 15 percent that financial planners recommend. Your employer match is free money, so you might as well take advantage of the opportunity.
Saving for the future is a must if you’re looking to have a relatively secure retirement. The decline in pension plans does not have to be a negative. If you take advantage of tax-deferred retirement plans like 401(k) plans along with an employer match, your money can really start to compound to an impressive sum over time.