This article is original content written by Thomas Scanlon, CPA, CFP® of Manchester, CT.
Many employers will offer a 401(k) to their employees. A 401(k) plan offers many advantages to employees. The biggest advantage is tax-deferred investing. These accounts are not taxed until distributions are made.
For 2021, an employee can contribute up to $19,500 into a 401(k) plan. Taxpayers over age 50 are allowed to contribute another $6,500 as a “catch up” contribution for a total of $26,000. This catch up provision was implemented because Congress did not think people were saving enough for retirement. Imagine that—for once they got it right.
Why should you contribute to your 401(k) plan?
- You are on your own with your retirement. That’s right, Long gone are the days when someone would go and work for an employer for 30 years and then retire. They would be eligible for a pension and get their social security benefits. Now most companies no longer offer a pension plan.
- Although some employers have eliminated their pension plan, many will still offer a company match. If your employer offers a match, participate in the 401(k) plan at least up to the amount the company is going to match.
What is another big benefit to a 401(k) plan? Having the money taken out of your paycheck automatically. This is huge. Remember, you can’t spend money you don’t have.
Do you want to have financial piece of mind in retirement? Put the most you can into your 401(k) plan because you’re going to need it.
Action Item: Employees should be participating in their employer 401(k) plan. This should be at least up to the amount of the employer match. For employees that aren’t covered by a pension plan, the 401(k) plan will likely be the foundation of their retirement plan.