Who Should Contribute to a 401(K)?

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Beyond Finance TeamPosted on Jun 6, 2018

Wondering “Is a 401(k) right for me”? The simple answer is that it’s a great retirement option for almost everyone, including those in need of debt relief or credit repair.

For some of us, retirement seems a very long way off. But with people living longer and Social Security’s future in question, you may need to save more than you realize. And the earlier you start investing, the more time your investments have to grow.

A 401(k) plan is one of the most popular ways to save for retirement. You should consider contributing to one even if you’re looking at debt relief options or need to pay off credit cards.

Sponsored by your employer, a 401(k) lets you invest a percentage of your paycheck (you decide how much, currently up to $18,500/year if you’re under 50). The money you invest isn’t subject to income tax right away, so every dollar you contribute lowers your tax bill that year. Think of your contributions as saving and investing some of your income that would otherwise be earmarked for taxes.

Any earnings you make on the money held in a 401(k) grows tax-deferred. This means those earnings are not taxed until you withdraw them. Meanwhile, tax-deferred growth gives you the opportunity to build substantial retirement funds over the long term (depending upon how your investments perform).

When you actually withdraw money in retirement, that is when you will pay the income tax. The hope is that you'll be in a lower tax bracket then because you won’t be earning as much.

Should you need the money before retirement age, you can withdraw it but will need to pay the income taxes that year plus a penalty.

Your employer will offer an array of stocks, bonds, and other investment options in the 401(k) plan. Then you choose how to invest, based on your financial goals and future plans. As your goals and plans change, you can change your investment choices.

If your employer offers a 401(k) contribution match, you should (at the minimum) contribute enough to take advantage of the full match. It’s “free money” you are being offered as part of your overall benefits package. As an example, your company might match 50 cents per every dollar you contribute up to 6% of your total salary. So if you invest 6% of your salary, your employer would match 3%, meaning you’d end up with 9% of your salary in your account but only need to contribute 6%. The company may have a rule that, if you don’t stay with them for a determined number of years, you will forfeit some of the matching dollars.

Many 401(k) plans offer the ability to borrow against your vested balance. The interest you’re paying will go to your retirement account, instead of to a bank or other lender.

Remember, you’re never too young to get started saving for retirement and a 401(k) is one great vehicle to do it.

For more information about 401(k) plans, you can visit https://www.irs.gov/retirement-plans/401k-plans.