Why A 401K Plan Is Good For You
Social Security is a great safety net and helps many retired people to survive in their old age. But Social Security was never meant to be the sole source of income for retirees. It was only meant to be a supplementary source of income to a person’s pension payments and other investments. Recognizing that people were not saving their money as diligent as they perhaps should, the government began to create incentives to help them save. The 401k plan came about as a way to encourage people to save money for their retirement years by giving them certain financial incentives.
But, retirementplanhelper.com/what-is-401k-plan.html">what is 401k plan. It’s a retirement plan designed for workers in a company. The plan is set up so that both employer and employee can contribute to it, but it’s managed by the company. The necessary, but enormous, advantage of a 401k plan is that it allows you to invest your money before it is taxed. All monies that you earmark for the 401k are placed into the plan pretaxed. Not only that, the monies are also allowed to interest, also untaxed until the time when you begin to withdraw it – usually at retirement. But even then, only the monies that you withdraw from the fund is taxed. And presumably, since you’ll be at a lower income level when you retire, the amount of money that you will be taxed will be lower as well.
The best piece of the 401k program is that it compounds your money tax free. The compounding effect can catapult your ultimate retirement income earnings upwards of thousands or even hundreds of thousands of dollars more than if the identical investment had been placed in a normal taxed investment vehicle. Assume, for example, that you’re in the 25% tax bracket, have $1000, and you invest it in a venture that is pays you 8%. At the end of the year, you will have earned $80. But when you take out taxes, you have have only $60 left – effectively meaning that your real return was 6%, not 8% as you had hoped. If your investment vehicle had been a 401k, however, you would have paid no taxes at the end of the year. Thus you would have netted the full $80.
Now eventually, of course, you’ll have to pay taxes – but in the meantime, you have the full use of all profits derived from your investment and are able to let them compound unencumbered. If you invest more than $1000 a year in your 401k plan, which many people do and if your investments average more than 8% a year, you could realistically come out thousands of dollars ahead when your retire.
Some employers entice workers to join their company by touting their generous 401k packages. In better economic times, it was not unusual for a company to match the employee’s contribution with an equal amount of their own. For example, if you gave $100 to your 401k plan, they would match it with $100 from their pocket. A great way to make money on your investment.
However, finding these great 401 packages in the current economic downturn, will be a challenge. Less companies are able to afford to offer pensions to their employees.This makes it even more imperative that you take control of your own retirement plan. But still, even if your company has a 401k plan, but no matching program in place, you should still definitely take advantage of it. When you retire, you’ll be glad you did.
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