Why Invest in a 401k?

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Saving your money in a 401k plan is a wise investment.
Saving your money in a 401k plan is a wise investment. (Image: Jupiterimages/BananaStock/Getty Images)

One of the key building blocks available to you for retirement is the 401k. It is a popular form of saving offered by the Internal Revenue Service, and came into law in the early 1980s. Investing in a 401k plan has many benefits, all of which make it an attractive option for anyone at no matter what age.

Retirement Savings

Perhaps the primary reason for investing in a 401k is because it is a savings tool for retirement. Americans are not saving enough for retirement, and for many reasons. However, while they tackle immediate concerns, Americans are not looking into the future for when they hit retirement. So it would be wise to invest in a 401k for the simple reason that it begins a savings process for retirement. And if you withdraw before the age of 59 1/2, you will pay a penalty, adding incentive to keep your money in your plan longer.

Tax Relief

When you invest in a 401k, you will see an immediate tax benefit. Investing in a 401k reduces your taxable income, meaning that when you file your taxes every April 15, your income will be lower, thus meaning you pay less in taxes (or get a larger refund because you paid too much in taxes in relation to your income). So if you made $50,000 last year, but invested $10,000 in a 401k, your taxable income is only $40,000.

Tax-Deferred

When you invest in a 401k plan, you choose how it is invested – be it a high-risk plan or a low-risk plan. No matter what plan you choose, your growth is not taxed on an annual basis. In a 401k, any growth you earn is what you keep until you decide to withdraw from the plan. When you do, only then is your money taxed. This process means your money is tax-deferred.

Matching Contributions

If you enlist in a 401k through your employer, there is a good chance your employer will match your contributions. According to CNNMoney, employers typically match 50 cents for every dollar you contribute, up to 6 percent of your salary. That means you are receiving free money from your employer just for contributing. Take advantage of this option as it will help your investment and savings grow at a quicker pace.

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