(Prudential is throwing a 4.01k race for retirement in Los Angeles on September 17th to raise awareness about retirement – want to join? – Check out their link to register – www.run401k.com )
- You save money on a tax-deferred basis – the money you make is taken from your paycheck and deposited directly to your retirement account, meaning Uncle Sam doesn’t get to take any of your money right now. You won’t pay taxes until you retire and withdraw it from your account.
- The money you invest will have compounding returns. Compound What?! Your principal (money you put in) makes interest, your interest makes interest, the interest you makes makes you interest and so forth. It’s a saving snowball effect.
- Match Me Up! – Most companies offer a match of 3% or higher. If your company offers this benefit, please take advantage of it. It’s basically free money if you contribute to your 401k. For example if you deposit 3% of your pay in your 401k, the company may offer a match of 3%. It’s a great incentive to save money for your future retirement.
- You can save up to $18,000 per year in 2016 or $24,000 if you are 50 years or older. Contributing to your 401k can bring your taxable income down. For example, if you made $100,000 per year, instead of being taxed at the 28% percent tax bracket, you will only be taxed at the 25% bracket because you maxed out your 401k account. This means you will only be taxed on the $82,000 ($100,000 – $18,000 = $82,000). This allows the government to take only $16,293.35 of your hard earned money. If you decide not to contribute to your 401k and have Uncle Sam to tax you at $100,000 the government is entitled to take $21,070.57 of your hard earned money in taxes. Do you really want to give Uncle Sam that extra $4,777.22 or would you prefer to save that money and allow it to grow tax deferred until retirement? (Please refer to khanacademy.org for basic US tax rate schedule to gain a better understanding of the mathematics)
- Penalty free access through a loan process. – While I don’t recommend borrowing against your 401k balance because you may miss out on compounding growth, there are situations where it may be in your interest to borrow against your 401k. The contract of your loan process depends on each individual’s employer. The government allows you to borrow up to 50% of your vested account balance to a maximum of $50,000 where you will have 5 years to repay your 401k loan with interest paid back to yourself. The 4 situations when you are allowed to borrow against your 401k balance are:
- Education expense for yourself, spouse or child.
- Preventing eviction from your home.
- Medical expenses
- First time home residence.
*The information provided on this blog is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Please contact your financial advisor or your company’s benefits for specific rules to your retirement plan.