Are you one of the almost 70 percent of Americans who aren’t putting nearly enough away in their retirement fund? If so, now is the time to make a change. If your company offers a 401k plan, you’ll want to get enrolled and start saving as soon as possible.
A 401k isn’t the only option you have for retirement savings, but in almost all cases, it’s the best way to go. Here are 10 reasons why.
1. Automatic Savings
When you enroll in your company’s 401k plan, you’ll complete a salary deferral form that tells your employer how much to withhold from each of your paychecks. This money is automatically deposited into your 401k account and invested in the portfolio that you choose.
Thinking about how much to save each time you get a paycheck, makes it easier for other expenses to get in the way. If you make the process automatic, it increases the chances that you’ll do it consistently every month. When it comes to savings, “set it and forget it” is almost always the best strategy.
2. Pre-Tax Contributions
Traditional 401k contributions are deducted from your paycheck on a pre-tax basis. This means that you won’t owe any income tax on the money you deposit into your account until you start taking withdrawals.
Making pre-tax contributions also allows you to contribute more to your account that you could if you had to pay income taxes on the money first. This creates a greater opportunity for compound growth. Since many people will be in a lower tax bracket after they stop working, it’s smarter for them to avoid the taxes now and pay them in retirement.
3. Roth Options
If you’re concerned that you might actually be in a higher tax bracket when you retire, there’s another option. Many of today’s 401k plans allow you to make Roth contributions as well. Choosing this path means you’ll pay income taxes on the money before it’s deposited, but when you take a withdrawal, both the money you put in and any gains come back to you tax-free.
Many employees take advantage of the opportunity to divide their contributions up between the traditional and Roth options. This will give you the most flexibility once you reach retirement age.
4. Employer Contributions
Most 401k retirement plans have an employer matching feature, meaning that your company will give you free money for participating in the plan!
In most plans, the amount your employer contributes to your account is based on the percentage of your salary that you’re putting away. It’s best to find out exactly how much you need to contribute to receive the maximum match and commit to saving at least that much.
You’ll also want to find out about your plan’s vesting schedule and do your best to stay put until you’re sure you’ll receive your full account value when you leave.
5. Loan Provisions
Although it’s best to not touch your retirement savings until you’re actually retired, sometimes things happen that are beyond our control. If you find yourself in a financial crisis and you need to access the funds in your 401k account, you’ll want to ask if the plan has loan provisions.
In many cases, you can borrow up to 50 percent of your vested balance from your account. You then pay the account back with interest over a 5-year loan term. Since you’re paying the interest to yourself rather than to a lending institution, this can be one of the best ways to access money in a pinch.
6. Smart Investment Options
When your employer sponsors a 401k plan, he or she has a fiduciary duty to ensure that the investments offered in your plan are suitable. You should have a broad range of options to choose from so you can design a diversified portfolio.
For investors who aren’t comfortable choosing their own portfolios, indexed and target-date funds can make things easier. If you’re not sure which investments to choose and would like professional advice, consider consulting with a financial advisor who can help you design a portfolio appropriate for your age and tolerance for risk.
7. Low Costs
The 401k plan sponsor (usually your employer) also has a duty to ensure that the fees in the plan are reasonable. For this reason, you can usually expect lower costs when investing in your company 401k plan rather than opening your own outside accounts.
When evaluating costs, you’ll want to look at the internal fund costs, administrative fees, and other plan expenses that are passed down to employees. For outside accounts, you’ll also need to consider trading costs and any additional advisor fees.
8. Maximum Savings Opportunities
One of the keys to building sustainable wealth is to maximize your tax-advantaged savings opportunities each year.
Depending on how much income you earn, you may quickly reach the limits of what you can contribute to traditional IRA and Roth IRA accounts. 401k contribution limits are much higher, making them the preferred investment option for most high-income earners.
9. Ongoing Education
Most company 401k plans offer financial education as an additional perk. At least once a year, a representative should come out to your location to answer questions about the plan and offer employees a chance to enroll and/or increase their contribution levels.
Your 401k website may also have retirement savings calculators and other tools to help you make greater progress towards your retirement goals.
When you stop working for your current company, you’ll have the option to move your money out of the plan.
Whether you’ve just retired or are simply moving on to another firm, you can complete a tax-free rollover. The funds are deposited into either into your new company retirement plan or to a traditional IRA. This gives you plenty of flexibility and allows you to consolidate your investment accounts for easier tracking.
Are You Ready to Move Beyond the 401k?
If you’re already maxing out your 401k and are ready to explore additional investment opportunities, we can help.
Call us at 512-994-0766 to schedule your initial consultation. We’ll discuss our goals-based investing strategy work with you to design a plan that’s perfect for your needs.