Should I contribute to my company 401(k) Plan?
Posted by Jessica Ellis on December 1, 2009 ·
Yes. Unless you absolutely cannot afford to set any money aside, at all—you should contribute to your employers’ 401(k) plan. It is one of the most powerful and useful tools that an individual can utilize for saving for retirement.
There are several benefits to making contributions to a company 401(k) plan that include:
Contributions made are NOT taxed as current income:
They come right off of your compensation/salary before taxes are withheld. This of course reduces your taxable income, allowing you to pay less taxes each year—and depending on the situation may even put you into a lower tax bracket.
Money held in a 401(k) Plan grows tax-deferred:
The investment earnings on plan assets are not taxed as long as they remain inside the plan. Only when you withdraw those earnings will you pay taxes on them (again, possibly at a lower rate). In the meantime, tax-deferred growth gives you the opportunity to build a substantial 401(k) balance over the long term, depending on investment performance.
Possibility of Employer Match:
Most employers utilize some kind of matching component to the 401(k) plan—which means they will match your contributions up to a certain amount or percentage. An individual will typically become vested in the plan based on “years of service” (although this depends on the details outlined in the plan document). Employer contributions are also pre-tax and are basically “free money” so it is best for anyone to take full advantage of the match, if available.
Ability to borrow against plan at reasonable interest rate:
You may be able to take a loan out of the plan to cover certain personal expenses, or pay off a high-interest debt, as long as the loan is repaid within the specified amount of time (as outlined in the plan document). This may or may not be appropriate for individuals but it is good to note that this feature may exist.
401(k)s are a very convenient and reliable way to save. You decide what percentage of your salary to contribute, up to allowable limits. Your contributions are deducted automatically from your salary each pay period. Because the money never passes through your hands, there’s no temptation to spend it or skip a contribution here and there…
