For most people, 401k plans are the best way to save for their retirement years. The 401k saving methods have been well developed over the past couple of decades and when used properly, can result in a significant increase in your investment. The popularity of this type of savings plan is mostly due to the tax benefits that are connected to the plan, and the matching contributions that employers will often make as part of their worker's benefit packages.
The main benefit that a 401k plan provides is tax breaks. Before there was a 401k investment option, most taxpayers had little choice but to pay higher taxes on the money they tried to save. This had the effect of reducing the value of their investments and led to the creation of a new section in the Internal Revenue Code. The way it works in principle is that the taxpayer puts money into their 401k and does not have to pay tax on it or the money it earns, until he or she makes a withdrawal. Presumably, the taxpayer will be retired when they need to access the funds in their 401k and therefore will be in a much lower tax bracket than they were when employed and putting the money aside.
In addition to a good deal on how you are taxed on your 401k savings, a 401k plan also tends to involve matching contributions by your employer. This is a very beneficial process for the employee, as a percentage of whatever gets put into a 401k will be matched by the employer. So a system of 75% matching contributions would mean that the company will give you $750 if you put $1000 in your 401k. This is a gift of money, essentially, and is a large reason why 401k plans are so popular.
401k retirement plans also offer the ability of the investor to invest his or her money into a variety of different funds. This allows the investor to diversify their investments the way they feel comfortable doing. Some people are more aggressive with their finances and are willing to store money in equities that are much more volatile but also offer the chance of higher returns if the investor is able to ride out the lows that typically occur during a long-term investment. More lower-risk funds can be chosen, especially as the investor gets closer to retirement age and will need access to the money in the accounts.
There are numerous benefits that come with 401k plans but like everything related to financial matters, experience and knowledge is required to be successful, or at least connections to people who are able to provide solid 401k advice. A taxpayer who is able to defer paying taxes until he or she is retired, receives 100% 401k matching contributions from their employer for a significant period of time, and chooses the best places to invest their money will likely have a very comfortable retirement.
The main benefit that a 401k plan provides is tax breaks. Before there was a 401k investment option, most taxpayers had little choice but to pay higher taxes on the money they tried to save. This had the effect of reducing the value of their investments and led to the creation of a new section in the Internal Revenue Code. The way it works in principle is that the taxpayer puts money into their 401k and does not have to pay tax on it or the money it earns, until he or she makes a withdrawal. Presumably, the taxpayer will be retired when they need to access the funds in their 401k and therefore will be in a much lower tax bracket than they were when employed and putting the money aside.
In addition to a good deal on how you are taxed on your 401k savings, a 401k plan also tends to involve matching contributions by your employer. This is a very beneficial process for the employee, as a percentage of whatever gets put into a 401k will be matched by the employer. So a system of 75% matching contributions would mean that the company will give you $750 if you put $1000 in your 401k. This is a gift of money, essentially, and is a large reason why 401k plans are so popular.
401k retirement plans also offer the ability of the investor to invest his or her money into a variety of different funds. This allows the investor to diversify their investments the way they feel comfortable doing. Some people are more aggressive with their finances and are willing to store money in equities that are much more volatile but also offer the chance of higher returns if the investor is able to ride out the lows that typically occur during a long-term investment. More lower-risk funds can be chosen, especially as the investor gets closer to retirement age and will need access to the money in the accounts.
There are numerous benefits that come with 401k plans but like everything related to financial matters, experience and knowledge is required to be successful, or at least connections to people who are able to provide solid 401k advice. A taxpayer who is able to defer paying taxes until he or she is retired, receives 100% 401k matching contributions from their employer for a significant period of time, and chooses the best places to invest their money will likely have a very comfortable retirement.
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