Are you wondering if you should start investing in a 401k retirement account? If you are already making contributions, have you worried that this may not be the best way to prepare financially for the future? Each person has unique financial considerations that must be taken into account, but for many people, the benefits of funding a 401k retirement account are substantial and should not be overlooked. These are some of the more important reasons why it may make sense for you to fund or continue to fund a 401k retirement account.
Automatic Deposits
In order to retire comfortably, you will likely need a large nest egg. This sizable amount of money likely will require you to make regular contributions into an account and for you to get a decent return on your investment. Unfortunately, many people have trouble making regular investment contributions manually. A 401k sponsored by your employer usually takes withdrawals directly from your paycheck. Because the contributions do not directly come out of your checking account, they are relatively painless to make. In addition, the value of your retirement account will generally grow slowly and steadily over time thanks to your regular contributions.
Tax Deferral
A 401k retirement account uses pre-taxed money as contributions. The money grows over time, and you do not pay taxes on this money until you take withdrawals in retirement. This is financially advantageous for many people because their tax rate after retirement may be much lower than their current tax rate. However, this is not the case for everyone. If you anticipate your tax rate being higher in retirement, it makes sense to consider a different type of retirement account with more advantageous tax benefits based on your specific situation. For example, withdrawals from an IRA account or untaxed because the contributions are made with already-taxed money.
Employer Contributions
Many employers that offer a 401k retirement account as a benefit also have an employer-matching program. The terms of this program may vary by employer. However, it is common for an employer to match your own contributions dollar for dollar up to 3 percent of your gross income. Even if your employer’s matching program is not as advantageous as this, consider that any employer-matching contributions are essentially free money. These contributions can help your account value to increase at a much faster rater than they it otherwise would. Because of this, it makes sense for many people to at least make a large enough regular contribution to take advantage of an employer-matching program.
Access to More Investment Options
Some people wonder if they should simply open their own stock account. A 401k account has many advantages, but it does penalize you for early withdrawals except in special situations. With this in mind, you may appreciate the flexibility of investing money on your own in an individual stock account. While investing some of your money in a non-retirement account is a smart idea, keep in mind that your individual account does not come with the benefits listed above. In addition, an individual stock account may not provide you with as many investment options as an employer-sponsored retirement account. Even if you have access to some investment options, keep in mind that you may need to make a larger initial investment with your own account than you would with a 401k.
Creating and following an effective retirement plan can be challenging, but it is essential if you want to enjoy a comfortable retirement in the future. Your unique retirement plan must be tailored to accommodate your current budget as well as your anticipated future needs. If your employer offers a 401k, you can see that taking advantage of these and other benefits could help you to reach your retirement goals more easily in the future. Spend time analyzing your current financial situation, and create a plan for the future. Consider how these advantages may be used strategically to improve your saving and investing efforts.
