Even if you’ve started saving for retirement a little late, it doesn’t mean any future efforts to save will be deemed obsolete. If your company offers to contribute to your retirement plan, it’s highly recommended to take them up on their match, as your investments have greater opportunity to grow and compound over the years. It’s an employer’s fiduciary responsibility to have your best interest in mind when offering a company-sponsored retirement plan.
Every company is different, but your contributions can be matched dollar per dollar, or perhaps 50 cents to the dollar, which means free money for your future. Volunteering to get started on a 401(k) is a financially responsible decision for retirement planning, and a handful of benefits coincide with contributing to the investment plan. Here are a simplified few for starters:
With a company sponsored 401(k) plan, a percentage of your paycheck will be contributed first before your income is taxed. Ultimately these accumulated contributions subtracted from your paychecks could put you in a lower tax bracket, which means you could potentially pay less income tax. In addition to this perk, your savings also have the potential to grow tax-deferred. Do keep in mind, taxes will be involved once money has been withdrawn from the account.
If you prefer to be able to withdraw tax-free, consider looking into a Roth 401(k) plan. The difference in a Roth 401(k) account is your contributions will be taxed. However, by the time you are ready to withdraw, there will not be additional taxes taken. There are also certain income requirements for this type of account.
Retirement Plans and Passive Gains
Over time your savings will “compound,” which essentially means your earnings will be earned within the account. After opening up a 401(k) account, all that’s left to do is let your paycheck passively contribute to it. You’d be surprised what you’ve accumulated by the time you’re ready to withdraw.
If you’re also the ambitious type, you may have a window inside your plan that allows you to invest in outside options, called a self-directed brokerage account (SDBA). These types of accounts can give you extra authority over your investments and access to invest a portion or all of your plan in outside mutual funds, exchange-traded funds (ETFs), etc.
Your 401(k) Funds Are Sheltered from Creditors
Through the Employee Retirement Income Security Act (ERISA), creditors or debt collectors are strictly prohibited from accessing the funds you have saved in your 401(k) account. In the event you hit a financial speed bump, no one has the capability to take a cent from your account without your say. Legally, your employer is the owner of the 401(k) plan and any sort of collectors, tax included, are unable to target or place a lien on your specific account. The IRS would need to jump through some fiery hoops to access those personal funds.
Optimize Your Funds
Additional platforms and tools are available to help you gain and reach your retirement goals, one being the 401(k) Optimizer®. As stated above, a self-directed brokerage account (SDBA) is another way to personalize your retirement plan and invest in funds outside the chosen funds by the plan-sponsor.