Reasons Why you Should Consider 401(k) for Retirement

If the company that you are applying for is offering a 401(k) plan and you are not participating in it, then please reconsider. There are several reasons why people aren't actively participating in this plan. While most of them are reasonable reasons, to say the least, there are also good reasons to enjoy your retirement life when you contribute to a 401(k) plan.

If you are keen on calculating it, consider this example. 

Say you are continually receiving a salary of $50000. Contributing at least 10% of it to the plan will let your reap great benefits. Every year, your savings will receive an 8% return rate, and upon retirement, you will receive more or less $2 million in your 401(k) by the time you reach the age of 65. 

However, this isn't the only reason you should participate in your 401(k) plan. There are other reasons as well, and here are some of them.

​Deduction before tax

​By the time you'll receive your monthly salary, the amount you choose to contribute to your plan will be deducted automatically, even before the deduction of your tax. This means that the portion of your salary that goes to your fees will be smaller, as well as your overall tax rate.

However, the amount that you can contribute to your 401(k) plan is limited, so please be mindful. Also, it is subject to change every year, so keep your eye on it.

Tax-deferred

The money that you contributed to your 401(k) plan is tax-deferred. This means that your taxable income throughout the years you worked for a company will be considerably lowered. This also means that your tax will be reduced as well, even if you moved on to a higher tax bracket. 

However, once you withdraw the money that you contributed, it will be taxed as a regular income. This might not be a big problem, however, since you got a significant chance of being in a lower tax bracket when you retire.

​High contribution limits

​Even though the amount that you can contribute to your 401(k) plan yearly is limited, that doesn't mean that your contribution limit is low. If you are one of those people who are willing enough to contribute a large portion of their salary to their retirement plans, then consider having a 401(k) plan. In the year 2017, the maximum contribution limit is $18000 or $24000 if you are age 50 or above.

Matching contributions

​Arguably one of the most significant benefits of enrolling in a 401(k) plan is to get matching contributions to your employer. Whether your employer matches your entire contribution or at least a percentage of it is a foolproof way to save more money in the future. 

For example, if your employer chooses to match your contributions by 5%, that will also be added to your account, with the same 5% of your salary. You can also contribute more, but the same 5% will only be added to your account. It is free money from your employer.

Once an employer chooses to match your contribution, you will surely be guaranteed return of investment upon retirement. However, employers decide to do this to make sure you will stay in the company before you are vested.

Automatic savings

If you are one of those people who have hard time-saving money once you get your hands on them, then enrolling in a 401(k)plan will be beneficial. The savings will be automatically sent to your plan even before you get a chance to withdraw, avoiding a scenario where you will be tempted to spend them before you contribute to your plan.

The savings will grow year after year because of the interest, and the earlier you start with your plan, the bigger your savings will be in the future. Also, if you manage to move on to a higher pay grade in the future, it will be an excellent idea to make your contributions even bigger.

Emergency benefits

​In a normal situation where you will have to loan a certain amount from your 401(k) plan before the age of 59.5, you are going to receive a 10% withdrawal penalty, adding to the costs from the income taxes. However, some employers nowadays let their employees borrow money from the plan with interest. You may also get your cash quickly in some cases.

However, as mentioned earlier, it is up to the discretion of the plan sponsors if they will allow the employee to take a loan, as well as the repayment terms. Also, the government will be taking charge of the maximum amount that you can loan as well as capping the repayment period for five years.

Takeaway

The 401(k)plan is an excellent way to have an easy-going retirement life in the future. If your employer chooses to offer them, it is an excellent decision to avail of the benefits that you can reap from this plan by contributing.

Also, if you are currently a part-timer, there is some good news for you as well. If the legislation passes Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019, you will be able to contribute to a 401(k)plan as well.