It can be difficult to make the right decision when it comes to retirement planning. There are 401(k) plans offered by employers, IRA plans, an investment portfolio and more. It can feel as if there are as many retirement options as there are people! However, if your employer offers a 401(k) plan, it may be a good idea to take her up on it. Here’s the scoop on 401(k) planning:
What is a 401(k) anyway?
The name 401(k) comes from a section of tax code developed during the 1980s to supplement pensions. Employers used to provide pensions which were managed by the firm and paid out an income over the course of a former employee’s retirement. However, the administrative costs rose and pensions became less manageable.
With a 401(k), an employee can control how his or her money will be invested. Many plans provide a spread of mutual funds with stocks, bonds, and money market investments. Plans also have a number of restrictions and rules that must be followed. However, if you follow the rules laid out on a 401(k), you will receive excellent benefits upon retirement.
Benefits of a 401(k)
There are many benefits associated with a 401(k). Here are just five of the perks provided by this retirement plan:
#1. Employer contributions. Often employers will match a portion of your investment in your retirement plan. Think of it like a boost to your paycheck. If you pass this up, you will be losing money you could retire on.
#2. Investment opportunities. A 401(k) plan offers a good variety of investment channels that you can utilize. For example, you may be able to choose from:
- Stock and bond mutual funds
- Company stock
- Money market funds
- Guaranteed investment contracts and other stable value accounts
#3. Tax deferred earnings. The income you invest into your 401(k) plan has not yet been taxed as income, which lowers your overall yearly tax bill. This way, you postpone payment of taxes on that income until you withdraw the money upon retirement. The idea is that, when you retire, you will be in a lower tax bracket than when you were actively earning money. Therefore, you would be paying less money back to the government than if you invested your money outside of a 401(k).
#4. Restrictions that work for you. Because of the tax benefits, it is very difficult to take money out of a 401(k) until you have reached the age of 59 ½ or it has been more than five years since you made your first contribution or you are disabled. This restriction helps keep your retirement money safe and secure.
#5. Compound interest. In short, this plan allows you to re-invest both the money you have invested along with the interest earned. This means your savings will grow exponentially over time.
If your employer offers a 401(k), it may be a great idea for you to take advantage of it. If your employer does not offer this retirement plan, get them in touch with us. We would be happy to help them establish a great plan that benefits you!