Information about your 401k
Your 401(k) is one of the most important retirement vehicles you need to secure your nest egg. Learn more about your 401(k) and why you should invest.
Top 5 reasons to invest in your 401(k)
- Secure comfortable retirement
- Employer Matches
- Tax Savings
- Taken directly out of your paycheck
- Your money grows more than savings account
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401(k) Features
Tax Savings
Some of the most compelling reasons to save money in your 401(k) are the tax benefits. A 401(k) is a Salary Deferral Plan. That means your employer does not report to the IRS as income the money that you contribute to your 401(k). Your employer does not withhold income tax from your contributions. This can save you a significant amount of taxes every year. For instance, if you are in the 25% federal tax bracket and you contribute $4,000 during the year, you would save $1,000 in income tax.
The other tax benefit is tax deferred growth, that is, you do not pay income tax on the growth of your funds, which lets your money compound more quickly than if it were taxed every year. Income tax is only paid when money is withdrawn.
Self Directed
Your 401(k) is self directed, meaning you are responsible for determining how much to contribute, what investments to select, and when to make changes to those investments. You will also decide when and how you withdraw your funds in retirement. Most importantly, and the reason 401k Alliance is available to help, you are responsible for the investment results that you achieve. Your company is only responsible to provide you with an appropriate selection of investment choices.
Vesting
Vesting means the funds belong to you. All of the money that you contribute, plus any earnings on that money always belong to you. Most companies have some kind of vesting schedule for matching funds which are contributed by the company. That means they have a certain number of years of employment or years since the contributions were made until you have ownership of the company's contributions. Most companies offer some kind of matching contribution of the amount that the employee invests in their 401(k) as an incentive for the employee to save. This means for every dollar the employee invests, the employer will add anywhere from 5% to 100% of that amount to the employees 401(k) plan. For instance, if the employer match is 50% and you contribute $1000, your employer will contribute $500. This is one of the most compelling reasons to invest in your 401(k). In this case, you have made an immediate 50% return on your money! This is the kind of return professional money managers can only dream about and why we believe you should take advantage of this kind of opportunity.
Investment Choices
Your employer will have an array of investment choices available in your 401(k) plan. There will be at least three choices, possibly hundreds, but most plans will have between 10 and 15. These alternatives could include mutual funds, money market funds, GIC's or guaranteed investment contracts, and company stock. It might seem like the more choices you have the harder it is to decide how to invest, but you generally have a better chance of achieving attractive results with more alternatives.
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Sources of Retirement Income
For most people, their future retirement income will come from three places; social security, company pensions, and personal savings.
Social Security
The future of social security is uncertain, and is being debated in Congress right now.
Company Pensions
If your employer offers a company paid pension, consider yourself lucky. Company paid pensions are being offered by fewer corporations today. This type of plan is known as a Defined Benefit Plan . The employer promises to pay you a pension, that is, a certain amount of income after retirement based on how many years you have worked for the company and how much you earned. Usually, these plans are paid for entirely by your employer. Company paid pensions are being phased out by more corporations every day and are being replaced by 401(k) plans.
Personal Savings (401(k))
Most employers today offer Defined Contribution Plans. 401(k) plans fall in this category. These plans don't guarantee you a specific income in retirement, but provide income based on how much you have contributed to the plan and what your investment returns are. Your 401(k) is a part of your personal savings and how much you are able to grow this part of your retirement nest egg may have the biggest impact on your lifestyle in retirement.
NOTE: Withdrawals from most qualified retirement plans are taxed as ordinary income and, if taken prior to age 59 1/2 years old, may be subject to an additional 10 percent federal tax penalty.
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History
After the Social Security Administration was created in 1935, the idea of saving some money now to be assured of income in the future has changed the way millions of people plan for retirement. Your 401(k) Plan offers you one of the best possible ways to save for a comfortable, worry-free retirement.
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Get started on your better 401(k) today!
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