The 401k employer sponsored retirement plan is a hidden gem on the list of employer-provided benefits. Employees designate a certain percentage of their pay to contribute to a tax-deferred account and they choose the allocation of stocks, bonds, and mutual funds into which this money will be invested. Employers frequently match a percentage of the employee contributions, basically “free money” for participating employees. There are so many reasons why you should take advantage of your companies 401k, but here are the top few.
The 401k contributions, in the form of a specific dollar amount or percentage of pay, are automatically deducted from each employee’s paycheck. The employee does not feel the “loss” of having to write a check to deposit money into the plan. Contribution amounts may also be increased, decreased, or stopped as necessary at the employee’s direction and according to plan provisions.
The employer-matching feature offered by many 401k plans is perhaps one of the most attractive options. Employers may match a certain percentage of the employee contributions up to a stipulated maximum. For example, an employer might match 50 percent of the employee’s contributions up to six percent. If the employee contributes six percent of pay, the employer will contribute three percent of the employee’s pay to the plan.
The tax benefits of a 401k make it a very attractive investment option. The employee’s contributions are usually tax deductible, meaning they do not count toward the employee’s annual gross income, which lowers taxable income. The money in the plan also grows tax-deferred and is rolled back into the plan, unlike the interest or dividends in a savings or brokerage account on which the account holder must pay taxes.
Other reasons to invest in a 401k include the fact that people can contribute more money to a 401k than an IRA and participants may take the money invested in a 401k with them when they change jobs. Participants may also take loans or hardship withdrawals from a 401k plan if the need arises. There are many more reasons why you should take advantage of your company’s 401k plan, so do some research and start investing.