As pensions have decreased to almost an extinct item, employers have turned to the 401(k) as a new retirement benefit. A 401(k) is a pretax-employer sponsored account. In some cases, companies provide an employer match or have minor time stipulations on how soon you can participate in it. Approximately half of workers do not have the 401(k) as an option, or another employer sponsored savings account, available to them (www.daveramsey.com).
There are several hard-as-steel benefits to utilizing your 401(k) to the fullest…
There are so few things you can say are free these days. However, contributing to your company’s 401(k) is free! There are no fees for contributing or for making changes to the account your money is invested in (as long as you remain employed there).
Even if you leave the company, your money can stay with those investments at no cost, in most cases. Sometimes companies impose administration fees, which are typically a minimal percentage of the account balance. However, it is not recommended to have these orphaned accounts because nobody is watching that account for you regularly and updating the investment (www.smart401k.com).
Not only is contributing to accounts free, but some plans have basic services to guide you in which areas to invest your funds. Of course you need to do your own research and stay on top of the changes you company offers, but potentially a few financial planning services could be added.
401(k)s are filled with pre-tax dollars. This has a great ability to grow without being taxed, making the dollars compounded at a quicker rate. Taxes will still need to be paid and are applied when one reaches retirement and funds are withdrawn.
According to the IRS limitations for 2014, a maximum amount of $17,500.00 can be placed in your 401(k) per year. For those contributing to their 401(k)s after the age of 50, there is an extra sum allowed to be contributed for “catch-up” (www.cnn.com). That additional amount is $5,500.00 per year, which can lead to a total max out contribution point of $23,000.00.
There are benefits to the younger generations for contributing to Roth 401(k) accounts. With these plans, you reap the benefits of tax-sheltered growth and tax-free withdrawals. The contributions are made post-tax, which can be a huge win if tax rates inflate between now and the time you retire. Note that not all employers offer a Roth 401(k) option, but it never hurts to contact your Human Resources Department to ask!
Having an employer match is a HUGE benefit, especially today with the Social Security’s future being uncertain as a retirement assistance benefit. There is a high speculation these days that Social Security will not survive through the retirement age for Generations Y and Z, and those yet to come.
Historically, Social Security benefits have replaced less than a mere 40 percent of pre-retirement income for workers. That doesn’t leave retirees with much income if they lack strong 401k account. In the past several years, 23% of the employers have dropped their match contributions (www.smart401k.com), due to the strained economy. Although many have resumed matching contributions, a larger percentage of employers find the contributions to be too expensive to keep up with it.
A typical match may be 50% for every dollar contributed up to 6-10% of your salary. One of the most common is a direct match dollar for dollar up to 3%. This match is essentially FREE money (more FREE stuff!). The company deposits a designated amount every paycheck, typically a percentage, but in some cases can be a straight dollar for dollar. The only stipulation to receiving this is that you must participate!
Since 2010, there has been a drop from 43% to 38% of employers that believe their employees are taking accountability of their financial future. 401(k)s are a great start to providing a retirement fund on an automatic basis. It will automatically deduct from your paycheck and deposit into your 401(k), and the best is that you will never even notice the change. A recommended contribution amount is 10% of your income, but if that amount is too much, at least try to meet the employer match to maximize the FREE money.
Create a hard-as-steel financial future for yourself, especially if you are not already utilizing your company’s 401(k) plan. Start today to apply all of these benefits to the fullest!
Posted on 07/09/2014 at 12:00:00 AM