A 401k plan is one of the most powerful ways to save for retirement because it does give the average employee some good benefits. These benefits can be many times greater than simply opening your own account or just putting your money into the bank.
First let’s answer the question What is a 401k? This plan lets you invest a portion of your income into a tax deferred savings plan. This plan can then grow without you having to pay any taxes until you eventually start to take money out.
Many times this growth can be much higher than you would receive by simply putting your money into a CD or buying a government bond. There are also a few other major advantages it has to offer.
1. Employers Could Reward You
Many employers will reward you for investing in your retirement account by adding more money into it. So if your employer matched you 1 for 1 and you add $200 into your account your employer will add an additional $200 so you have doubled your money simply by investing.
Not all employers will do this, but if yours does it can definitely be a great idea to take them up on the offer, after all if someone is giving away money wouldn’t you take them up on that offer?
2. Tax deferred Growth
This is even more powerful. When you invest money and make more money off of it you will have to pay an income tax on the money that you made. However if you put away money into a 401k plan and it makes money you can simply reinvest it to make even more money and not have to worry about paying taxes on it until you withdraw.
By deferring taxes your money can grow at a much faster rate because it is not being slowed down by the IRS. In addition to this any money that you do invest in a 401k can be invested before it is taxed.
So you are putting your money into the account making money in the account with it and not have to pay taxes on anything until you start to pull money out.
3. Withdraws
The majority of people will not consider the 401k withdrawal rules to be a good thing because they penalize if you take money out early. However this penalty is just what some people need. Think about this if there was no penalty for withdrawing money early how many people would just spend their life savings on a new car and wide up with nothing when they retire.
There are disadvantages to this part as well, but overall it helps the majority of people from spending their savings too early.
4. Hardship Withdraws
Of course there can be are always times when you simply need to take out money. You might have some sort of disability or some other life emergency has happened. In this case you might able to take money out early without paying a penalty so the plan does have some benefits.
Not all people are right for this plan, but if you are not using it you had better have some sort of savings plan because social security isn’t going to be around forever.
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