Top 10 Reasons to Invest in Your Employer’s 401(k) Plan
Investing in a 401(k) plan is one of the most popular ways to save for retirement. If you aren’t already contributing to the plan offered by your company, here are the top 10 reasons why you should.
Every time you get paid, your employer automatically deducts a contribution. Worried you’ll miss the money? Enroll after your next annual review and set your contribution percentage to the same percentage as your salary increase. You won’t miss what you didn’t have.
Get free money.
Years ago I had asked a colleague of mine about investing in the company’s 401k. When he said “it’s free money” I was hooked.Over 70 percent of plans feature matching contributions of some type. Some even match employee contributions dollar for dollar up to a certain percentage. Today, I invest the highest match percentage to make sure I’m still getting “free money”.
Get tax breaks.
You get two tax breaks by investing in a 401(k) plan. Your contributions are tax-deductible and don’t count toward your gross income, lowering your taxable income for the year. In addition, your earnings are tax-deferred. You don’t have to include them on your tax return until you make a withdrawal.
Your interest compounds.
As with a traditional savings account, your interest compounds. This means you earn interest on the principal as well as the interest you’ve already been paid. Because your earnings are tax-deferred, they roll back into your plan and help your retirement nest egg grow faster.
You buy low and sell high.
Each time. you make a contribution, you use the same amount of money to buy securities. You buy fewer shares when prices are higher, and more shares when prices are lower. Over time, the average cost of all your shares is lower than if you watched the market and tried to buy the same shares at their lowest prices.
Save more than through an IRA.
You can contribute more to a 401(k) plan annually than you can to an IRA. This means you save faster for your retirement.
Some people prefer to manage their own investment portfolios. It takes a lot of time and experience and a little luck to create a diversified, profitable portfolio. With a 401(k) plan, professionals manage your portfolio for you. There is a fee, but many financial planning experts agree that it’s money well spent for those who aren’t sophisticated investors.
Withdraw emergency money.
Many plans allow you to make hardship withdrawals, which you don’t repay, in case of emergencies. Some plans may also offer loans, which you do have to repay.
Take it with you.
If you leave your employer, you can roll the funds from your 401(k) plan into another qualified retirement plan without paying taxes or a penalty. However, you have a limited time to do so.
Supplement Social Security.
Social Security is meant to provide, at most, one-third of your income when you retire. Funds from a 401(k) plan may be a way to make up the difference.
Helps with a home purchase
I was able to secure a mortgage much easier because of my 401(k). From a bank’s perspective, the balance in my retirement account was an asset and lowered their risk of lending me the money.
Most people don’t have the knowledge and experience to be successful investors and provide for retirement through savvy investments. Participating in a 401(k) plan lets the experts manage your portfolio with your consistent and easy-to-make contributions. Look into your employer’s plan today. Don’t miss your opportunity for “free money”.