A 401(k) plan is a retirement plan in which an employee can elect to have the employer contribute part of the employee’s wages to the plan on a pretax basis. These deferred wages are not subject to income tax withholding at the time of deferral.
With a 401(k) you can have money “saved” for you – meaning: you can have it deducted from your paycheck before you get it.
– The money saved won’t be counted as taxable income
For example, suppose Henry Edwards earns $52,000 a year, of which he elects to contribute $5,000 to a 401(k). Now, when he fills out his tax return, he has only $47,000 of gross income to report. If he had taken the full $52,000, paying tax on the last $5,000, he’d have around $3,500 to invest in a regular mutual fund, not $5,000.
– Money contributed to a 401(k) compounds, tax-free, until withdrawal
Therefore, you get a double tax shelter. Just to make the deal sweeter, many employers make a contribution for each dollar an employee contributes. If Henry contributes $5,000, and his employer matches 50 cents on the dollar, he’d have $7,500 in his account, growing tax-deferred.
– You can contribute up to 20% of your gross wages each year to a 401(k), up to a maximum of $10,500 in 2000
Start contributing early in your career and you’ll amass a six-figure, perhaps even a seven-figure amount in your 401(k). If you invest $2,000 in a tax-deferred retirement account each year between ages 20 and 25, and never invest another dime, you will have more money when you retire than if you wait until age 25 and invest $2,000 every year in the same account for the next 40 years. The best 401(k) plans offer a family of mutual funds, so you can switch investments according to the Money Movement Strategy.
Engage with us today to learn more about how to participate in your employer’s 401(k) plan!
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