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What are the Benefits of 401(k) Plans?

Don’t be one of those people who think that accumulating more money in your bank account will eventually make your rich or financially independent. A 401k plan is one of the best retirement plans on the face of the earth. It allows you to live a carefree life whilst contributing and saving for your retirement. By contributing as less as 3 percent of your total monthly income to the 401k plan, you can maintain your lifestyle and also be ensured of having a good time in your twilight years.

Here are the 3 benefits of a 401k plan that will convince you to create an account today without any delays.

1. Matching plan

Did you know that you can save 50 percent on your 401k contributions? You heard it right. With the 401k matching plan, your employer will pay 50 percent of your total 401 k contributions.

401k

Let’s take an example. Let’s say your monthly salary is $10000 and you want to contribute 5 percent of your total income to the 401k plan. So, that 5 percent comes down to $500; which is a decent amount. According to the 401k matching plan, your employer will contribute 50 cents per dollar to your 401k plan. That is $250 per month. So you only have to pay the remaining $250 from your pocket.

2. Auto-escalation

Your 401k contributions will now get auto-escalated unless you opt out from it. Due to complacency or laziness, most employees do no increase their contributions to the 401k plan even with an increase in their monthly income. They think it is too risky it is better to wait till they hit a substantial financial growth. But the 401k plan authorities don’t fancy this approach. They want you to increase your contributions to the plan irrespective of your financial condition. It is recommended to update the percentage of your contributions each year as your income continues to grow.

3. After-tax contribution

Another benefit of a 401k plan is that there are some plans that allow you to contribute more or extra money in your 401k if it is already taxed. This is known as an after-tax contribution. Bear in mind that, if the tax percentage changes at the time of withdrawal of money from the plan, you will have to pay extra tax. Likewise, when the tax percentage decreases, you make more money. 

There is one more benefit to the after-tax contribution that you should know. If in future, you decide to convert your 401k plan to Roth IRA, you won’t be charged the Roth conversion taxes on this additional after-taxed amount that you added to your plan.

Conclusion

Do not enroll in any retirement saving plan if you are still in debt. It is better to clear all your debt or come close to clearing it before you think about investing your money in a 401k or a Roth IRA plan. Although, once you are good to go, begin contributing to your 401k plan and get ready for fantastic savings.

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