The Benefits of a 401(k) Retirement Plan
Everyone Should Take Advantage of 401(k) Savings
Apr 7, 2009
Retirement savings options come in all shapes and sizes. The IRA is a very popular retirement investment vehicle that allows for tax deductions on contributions, thus lowering a person’s taxable income. The SEP IRA is a simplified retirement investment choice for self-employed workers. However, the 401(k) retirement plan stands alone as the most widely-offered retirement savings option for numerous reasons.
What is a 401(k) Retirement Plan?
The 401(k) is an employer-sponsored retirement savings plan that allows employees to save money for retirement by setting aside a certain percentage of the employee’s paycheck toward contributions. Retirement savings from the 401(k) is tax-deferred, meaning the person is taxed only at the time of withdrawal after age 59-1/2. Effectively, the 401(k) works behind the scenes to build a sizable nest egg by the time the person retires.
What Percentage of Income Should a Person Contribute to a 401(k) Retirement Plan?
When electing to participate in an employer-sponsored 401(k) retirement plan, the employee must decide upon a percentage of income to set aside for retirement. While of course it would be best to max out 401(k) contributions, most people simply cannot afford to do so. Therefore, it is advisable to strike a balance of approximately 8-10 percent for 401(k) contributions up to $16,500 ($22,500 if 50 or over) in 2009.
What is a Matching 401(k) Retirement Plan?
The 401(k) is undoubtedly the most popular employer-sponsored retirement investment vehicle. Particularly if the employer provides matching on their 401(k) plan, employees can enjoy greater retirement savings- even double if the employer matches dollar for dollar. This is precisely why an employee of a company who offers 401(k) matching should take advantage- it is essentially free money that will grow over time.
What Is a Roth 401(k) Retirement Plan?
Increasing in popularity is the Roth 401(k) retirement plan. The Roth 401(k) combines the best features of a traditional 401(k) and a Roth IRA into one retirement savings plan. The principal difference between a traditional 401(k) and a Roth 401(k) is the way taxes are paid. The traditional 401(k) is tax-deferred, meaning taxes are paid upon withdrawal at retirement. A Roth 401(k) is tax-free upon withdrawal.
The Bottom Line on a 401(k) Retirement Plan
Bottom line, all employees with companies who offer a 401(k) retirement plan as part of its benefits package should participate. Even if the company does not offer matching on their 401(k) plan, the employee will reduce taxable income and will start to build a nest egg for retirement.
See related articles, “Retire Tax Free With a Roth IRA," "Retirement Planning for the Self-Employed," and "How to Roll a 401(k) to an IRA."
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