401(k) Plans: Getting Better With Age
As the 401(k) continues to evolve, it remains a great retirement saving strategy.
Since their launch in 1981, 401(k) plans have grown to become the most popular company retirement plan in the United States. According to the Investment Company Institute, 401(k) plans hold $7.4 trillion in assets, in more than 710,000 plans, on behalf of nearly 70 million active participants, former employees and retirees.
Saving in a 401(k) has never been easier. Many more employers now offer automatic enrollment with built-in automatic savings increases each year — along with robust investment decision support tools. Here are six more reasons why your 401(k) continues to be a great retirement saving strategy:
Your savings are automatic. With your 401(k), you’re following the core financial planning principle of “pay yourself first.” Money is deposited from your paycheck to your account without you even having to think about it. It doesn’t get much easier than that.
Tax-deferred compounding. You defer paying income tax on money that you save in a 401(k). Income tax won't be due on this money until it is withdrawn in retirement. The money that would otherwise go to pay current taxes remains invested for greater long-term growth potential. As a result, any interest, dividends and capital gains you earn can benefit from the power of tax-deferred compounding.
Tax-deferred compounding: the sequel. Employees who are age 50 and older are eligible to make additional “catch-up” contributions beyond the annual Internal Revenue Service limit. This is a significant benefit, especially if you’ve not been able to save as much because of competing financial priorities (such as saving for a college education or supporting aging parents). Catch-up contributions that you make also benefit from tax-deferred compounding.
Free money courtesy of the employer match. You should always aim to save at least enough to get a full employer match (subject to your plan’s vesting rules). A 401(k) match of 50 cents for each dollar you save in the 401(k) plan up to 6% of pay is a 50% return on your investment. A dollar-for-dollar 401(k) match doubles your money.
Roth contribution option. If available to you, contributions to a Roth 401(k) are made with after-tax dollars (no tax deduction), but potential earnings and distributions are tax-free, as long as you have held the account for at least five years and are at least 59½ years old. If you think you’ll be in a higher tax bracket during retirement, a Roth option may be a sound strategy (or consider diversifying your money between both traditional and Roth options).
Questions? Reach out to your wealth advisor.
Informational Sources: Investment Company Institute 401(k) Resource Center (accessed September 4, 2024); Investopedia: “401(k) Tax Benefits and Advantages” (September 11, 2024).
LPL Financial and its advisors are only offering educational services and cannot offer participants investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advisory services must be obtained on your own separate from this educational material.
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