401k accounts are one of the more widely known and commonly used retirement accounts out there. Most employers give their employees the opportunity to open and contribute to a 401k account as part of their benefit package. If you are self-employed and do not employ others you can also opt for a solo 401k account. Put simply, a 401k works by contributing a set amount of money into the account that is deducted from your paycheck. The money is then invested into the stock market and multiplies throughout the years. Here are a few benefits to having a 401k account.
Employer match
When you choose to open a 401k account through your company, ask if they offer an employer match. When an employer offers a match that means they will match the amount of money you put into the account up to whatever percentage they offer. So for example, if your employer offers a 2% match and your paycheck is $1000 an you elect to invest 2% into your retirement account your contribution will be $20 and your employer will match your contribution and put $20 into your account themselves. The most common percentage employers will match is normally 1-4% but can be up to 100%.This is a great benefit to take advantage of because it’s basically free money!
Tax Benefits
With a 401k you decide on the amount of money you want deducted from your paycheck to invest in your account. The money you contribute into the 401k each paycheck is not pre-taxed meaning you do not pay taxes on the money that enters the account. This means that whenever you decide to withdraw money from your 401k, taxes will then be taken out and will fall under the income tax category. That may not seem ideal, but think about it like this; the higher the percentage of your paycheck you contribute each month, the lower your taxable income is for that year. Yes, you will have to pay taxes on the money eventually but by doing this it will only make your retirement account grow.
Control your risk tolerance level
401k accounts invest in the stock market which can seem scary with how volatile it can be; but you can set your preferences to however aggressive or conservative you want to be. This is called your risk tolerance level. It is typically recommended to have a more aggressive risk tolerance when you are younger and just entering the workforce. As the market fluctuates you are able to bounce back in plenty of time if the market takes a dip. Once you get some more hefty expenses like a house or car payment, and maybe a few kids, it’s okay to lower your risk tolerance level to a more moderate pace. Once you are considering retirement within the next few years, it is recommended to ease up and go a little more conservative.
Opening a 401k account is a great asset to have. With the money being automatically taken from your paycheck you won’t even know its missing. So that when you are ready to retire, you have peace of mind that you have set some money aside.