Updated by Chandler Julian
A 401(k) plan is a type of retirement plan that's sponsored by an employer. It is a way for you, as an employee, to save and invest money for retirement before it's taxed. Saving before taxes are applied is a huge benefit of a 401(k) plan because the taxes you would have otherwise paid if you had taken the money home on your paycheck, is instead, invested in your retirement account and help your account grow even faster through compounding interest. You do not pay taxes on this money until you withdraw it from your account in the future.
Here are a few benefits to saving for retirement in a 401(k) account:
- Making pre-tax contributions into the plan reduces your taxable income for that year
- Control how your money is invested once it is contributed into the account
- Grow your contributions in a tax-deferred account. Gains are not taxed until they are withdrawn from the account.
- Roth contributions are also allowed in certain 401(k) plans. This enables you contribute money that you have already paid taxes on. Earnings made on those contributions are able to be taken tax-free in retirement.
- Matching employer contributions are often used to attract or retain employees. Check the Summary Plan Document for more information about what your plan offers.
- Fund or supplement your future retirement income. In addition to Social Security or other income benefits, your 401(k) account can be used to provide additional income throughout your retirement.
Consider these benefits and start planning for your future by enrolling in your employer sponsored 401(k) plan!
Ready to get started? Log into your account and setup your contributions today!