A 401(k) plan is a savings and investing option, sponsored by employers, that gives employees like you a tax-advantaged way to put aside money for retirement. Named for the subsection of the tax code that allows this type of plan, a 401(k) is funded through automated deductions from an employee’s paycheck. Enrollment is different at every company, but it’s a relatively simple process.
A 401(k) can help you save a lot of money in taxes.
In a traditional 401(k), those contributions are pre-tax dollars. For you this means that contributions made will be subtracted from your taxable income, lowering the amount of taxes you owe each year. A Roth 401(k) is a different story, and we will cover that in another article.
The tax benefits don’t stop there. An ordinary investment account is subject to capital gains taxes every year. Investments made in your 401(k) plan grow tax-deferred, meaning investment gains aren’t taxed until they’re withdrawn. Since your 401(k) grows tax-deferred, every dollar you would normally be losing to taxes is growing too.
Not making use of the employer match is like turning down a raise.
Some companies match a portion of their employees’ contributions. If they match up to 3% of salary, for example, every dollar you contribute up to that limit will be matched by a dollar from your employer. If your company offers this, take advantage!
You don’t lose what you’ve saved and invested if you leave the company.
Some employer matches have to vest. That means you need to be employed for some length of time (usually a year or two) before the employer match portion is fully yours. The amount you contribute is always yours, no matter what.
If you leave your employer, for any reason, your 401(k) is still yours. There are a number of options for what to do with it, but the most important thing to remember is that it goes with you.
If you have access to a 401 (k), it can be a valuable tool for investing in your long-term future.
We know that it can be overwhelming to balance saving for the future versus your daily money challenges. If a 401(k) plan is offered at your company, chat with a BrightDime coach about how to make it work for you.