Advantages of retirement accounts
No matter the size of your company, employees may enjoy the benefits of participating in a 401(k) plan. One of the most popular retirement plans around, this is a proven way to save money for your golden years. Just consider these attractive features:
- Tax deferrals: You pay no current tax on the amount of salary deferred to your 401(k) account. Contributions are made on a pre-tax basis. Therefore, you save tax on those amounts, plus your earnings, until you are ready to make withdrawals (usually, after you have retired). This gives you plenty of time to build up a nest egg.
- Contribution limits: Although the tax law restricts the amount that can be deferred to your personal account, the limits are relatively generous. For 2018, you can defer up to a maximum of $18,500, or $24,500 if you are age 50 or older. These contribution limits are indexed for inflation each year.
- Matching contributions: Frequently, your employer will match a portion of your deferral, so there is an added incentive to participate. A common match is 50% of the first 6% of the amount you save. For instance, if your salary is $100,000 and you contribute 6%, or $6,000, to the plan, your employer may provide a matching contribution of $3,000.
- Convenience: Many people find that having money automatically deducted from their paychecks is easier than trying to save through other means. Some plans have an auto-enrollment feature to further encourage participation.
- Loans: The plan may permit you to borrow from your account for specific reasons, such as the purchase of a primary residence, a child’s education, unexpected medical expenses or severe economic hardship. Generally, the loan must be paid back with interest within five years, although this time frame may be extended for a home purchase. The interest you pay goes right back into your own account.
- Investment options: Typically, you will have a wide range of investment options to choose from, including mutual funds targeted to your retirement date. You can allocate your dollars based on your particular circumstances, objectives and tolerance for risk. Consult a financial expert to tailor your allocation to your specific needs.
When should you start saving? The sooner, the better. On the other hand, even if you did not begin to participate in a 401(k) until later in life, you can make up lost ground by maximizing your contributions. For example, if you are five years away from retirement, you still may be able to contribute six figures to your account, assuming you do not otherwise need the money.
Finally, 401(k) plans are beneficial to employers, too, allowing them to attract and retain quality workers.
Try to make saving for retirement one of your top priorities. Combine the benefits of a 401(k) or another employer-sponsored plan with your personal investments.