There is an old saying, ‘A penny saved is a penny earned.’ Truer words have never been spoken, well at least when it comes to investing in your retirement through your 401k plan. We have all heard different information about how important it is to invest for your future and that social security might not be there. I am not going to make that argument, but even if it was, is that enough to live on?
Retirement isn’t what it used to be. You don’t pay off your house before you retire, live on your social security and just try to make ends meet. You travel, you go to all those places that working never afforded you time to do, you pick up that hobby that always took too much time, you enjoy your kids and grandkids, you want to do all that you always wanted to do, you find out what makes you happy that doesn’t tie you to an employer and responsibilities. The last thing you want to do is have to budget if you can pay property taxes, get groceries, heat/cool the house, etc.
Now that we have established that we want to retire with a bit of comfort, let’s talk about that 401k plan that you’ve seen the paperwork for but haven’t gotten around to filling out. The 401k plan invests your money into where you select it to go to, but your benefits and investments don’t stop there. We are going to touch on four major reasons that you, yes you (and me too), should pick up that pen and start filling out that paperwork.
- Pre-tax contributions
Your contributions are done on a pre-tax basis. The best way to show this is through an example, if you make $75,000.00 a year and have average deductions, you decide to contribute $100 per pay to your 401k, you will only see a difference of $70.25 on the total of your paycheck. So you just made $29.75 just for investing in your future AND you lowered your total taxable income.
- Employer Contributions
Most 401k plans the employer will match 50% of your contributions up to, usually, about 6%. So when you contributed that $100 from above, your employer gave you $50 just for doing so. If you find any investment that will give you 50% return on your investment, tell me about it because I am investing in that one!
- Earnings are on a tax-deferred basis
Why is this one so important? Well as you are making money from investing pre-tax dollars and getting all that loot from the generosity of your employer, you do not pay taxes on any of it. You don’t pay taxes on the money your employer matches, the dividends you earned or the capital gains you are raking in. But Uncle Sam always gets his money, right? You bet, but when he gets his hands on your 401k money it is when you start drawing it. At that point, you are more than likely in a lower tax bracket, so you aren’t paying near as much tax on it as you would have.
- Protected from creditors
This one isn’t a big deal to everyone, but it is definitely worth mentioning. No one plans to have trouble with creditors or having to go through some sort of legal hearing for someone to try to get a payment from you. In the slim chance that this happens to you, your 401k nest egg is safe. It is protected from normal creditor issues and thus will not completely derail your retirement goals should you have a bump along the way.
So I encourage you take a hard look at your retirement goals and how you can make 2018 be the time you move even closer to them.
