The importance of investing in your 401(k)
Do you dream about the life you want to live after you retire? Maybe you want to travel, relocate to a new city or state, join a country club and play golf every day, or buy a boat. The list can go on forever. Strong savings habits are one of the keys to achieving any of these dreams. Setting aside a percentage of your paycheck toward your 401(k) may not seem very enticing right now. However, it could be more relevant for younger workers when they reach the age of retirement. So, what are some benefits of contributing to your 401(k)? Let’s discuss.
Traditional or 401(k) contributions (other than roth) are “before tax”, meaning the amount you choose to contribute to your plan is deducted from your paycheck before income tax is taken out. This means, you will likely owe less income tax because your contributions reduce the total amount of pay that is taxed.
You’re in Control
You get the choice of whether to contribute to your 401(k), how much to contribute to your 401(k), and when to adjust the contributions, within limits. Check the contribution limit periodically, so you know how much you may be able to save.1
If you decide to change employers, the money you’ve invested in your 401(k) and its earnings belong to you. You may have the option to:
- Leave your account with your previous employer.
- Roll over your funds to your new employer.
- Roll over your funds to an individual retirement account (IRA).
- Cash out your 401(k), however, this may result in early withdrawal tax penalties, and you will owe income tax on the full amount.
It’s always important to discuss these options with your employer to see if you can leave your 401(k) with them or roll it over to your new employer.
Employer Match Benefits
Some employers offer to match a percentage of your contributions. Some may even match dollar to dollar, doubling the contribution you make to your 401(k), courtesy of your employer. And just like your contributions, the employer’s contributions are also pre-tax before income tax.
There’s never a wrong time to start contributing
Whether you’re new to the workforce or retirement is around the corner, it’s always a great time to start investing in your 401(k). However, the earlier you start investing, the more time your money has to grow. This is called compound interest, meaning you earn interest on the principal amount of an investment plus accumulated interest. Compounding can have a significant impact on long-term investments and should be considered a powerful ally when saving for retirement. It may not seem like much looking at your 401(k) in the early days, but compounding can add up.2
The bottom line is that it never hurts to start contributing to your 401(k) if you haven’t already. If you are unsure of how much you should contribute, talk to your employer about options and see if they offer employer match benefits. As you can see, understanding the benefits of a 401(k) can have a long-term impact on your financial well-being.
This blog is up to date as of March 2022 and has not been updated for changes in the law, administration or current events.