The Benefits of a 401(k) Plan

William Miller |

If you are starting a new job, you may have the opportunity to open a 401(k) through your new employer. In some cases, the employer will also offer matching contribution funds up to a certain percentage. While it sounds like a no-brainer to take advantage of these benefits early, less than one-third of employees ages 25 and younger participate in their employer’s 401(k) plan. 

It’s essential to understand the benefits of investing early and how to set yourself up for success in the future. Here are some key benefits to investing in a 401(k). 

Retirement Plans Offer Tax Breaks  

One of the most important reasons to start investing in a retirement plan early is the tax breaks that come with it. Every person remembers the feeling of getting their first pay stub and seeing a large percentage of their pay taken out for taxes. By investing in a 401(k), you can save money before those taxes are taken out. 

The money they put away now will grow and will not be taxed until you begin taking distributions from the account in retirement. 

Potential Employer Contributions 

Another incentive of investing in a 401(k) is the employer contributions. Every employer is different, but many will offer some type of matching contribution for those who choose to participate in their sponsored retirement plan. Employer contributions are a part of your benefits package.

Let’s say your employer will match contributions “dollar for dollar” for up to 4% of your paycheck— that means any contribution up to 4% will be doubled. In this scenario, you should aim to contribute at least 4% of your paycheck in order to take full advantage of your employee benefits.

Automatic Contributions 

Not only is opening a 401(k) a smart idea, it’s also very easy to contribute to one. Contributions are taken from your paycheck pre-tax and deposited directly into the 401(k). If you start saving early on, you probably won’t even notice a difference in your take-home pay. Also, most 401(k) plans make it easy to automatically increase contribution rates each year—something that you might consider looking into. 

Comfort in Retirement 

Lastly, the earlier you start to save, the more likely you will be able to retire on your terms. Compound interest builds over time, so the longer their account is open, the more the account will have earned in capital gains. In addition to that, starting now will help build a good habit of saving every month.

Whatever career path you choose, saving for retirement is an important step.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes.*