It’s unfortunate that only about 60% of the current workforce has access to a 401(k) plan. Because of their generous annual contribution limits, 401(k)s offer workers ample opportunity to grow their nest eggs for retirement.
If you’re already contributing to a 401(k), you’re off to a good start. That said, if you’re not maxing out your annual contribution limit, which is currently $18,000 for workers under 50, then you may want to think about increasing those contributions. The more money you put into a 401(k), the more you’ll lower your tax liability, and the more you stand to accumulate over time. Furthermore, you should especially make sure to contribute enough to take full advantage of whatever matching dollars your employer offers.
The benefits of 401(k)s
The beauty of 401(k) plans is that they allow your money to grow on a tax-deferred basis. This means that if your investments make money, which they hopefully will, you won’t pay taxes on your gains until the time comes to take withdrawals in retirement. Funding a 401(k) at a relatively young age will also allow you to take advantage of compounding and turn a series of smaller contributions into a sizable sum down the line.
Another great thing about 401(k)s is that contributions are deducted from your paychecks before taxes. This means you’ll save money in the near term just by funding your account.
While other savings options, like IRAs, offer similar benefits, 401(k)s have generous annual contribution limits that allow for even more growth. Currently, workers under 50 can put up to $18,000 in tax-free earnings into a 401(k) each year, while those 50 and older get a catch-up provision that raises this limit to $24,000. Now most people can’t max out their 401(k)s, or even get close. But the more you are able to contribute, the better.
Are you getting your full employer match?
Another feature of 401(k)s that makes them so valuable is the employer match. It’s estimated that more than 90% of companies offering 401(k)s also offer some type of matching incentive. Unfortunately, a good 25% of workers don’t contribute enough of their own money to take full advantage of…