What Are The Benefits Of A 401k Plan?
The benefits of a 401(k) plan include:
- Your taxable income for the year in which you make a contribution is sheltered from income tax. Thus, your tax will be lower because the money you contribute to a 401K plan is not taxed until you withdraw it.
- If you earn less than a threshold level, you may be eligible for a federal tax credit for all retirement savings contributions which provides additional savings.
- The earnings on assets in a 401K Plan are not taxed when earned. Neither is the increase in value of the assets or any dividends or interest. The earnings and increase in value are taxed when you make a withdrawal. This feature allows your money to grow more quickly than it would if you had to pay taxes on the interest or dividends every year.
- You may be able to get your hands on the money invested in a 401K Plan in an emergency by means of a hardship withdrawal or by borrowing from your account if your Plan allows. (To learn more about "hardship withdrawals" or "borrowing", see below) It is still advisable to have an Emergency+Fund outside of a 401K plan.
- If your plan allows matching contributions, the employer-matching feature of a 401K serves as a source of extra income. The employer's contribution is not taxed the year it is received.
- Since the money that goes into a 401K Plan is automatically taken out before you receive your paycheck, a 401K Plan can help you save. For many people, money they never see is money they don't miss.
- The investment options offered by your 401K plan may allow you to invest in professionally managed mutual funds without having to meet their usual minimum investment requirements. Investment choices provided by Plans can vary widely.
- If you invest in a mutual fund, you're able to make investments each pay period without being charged multiple fees.
- Dollar-cost-averaging is when you invest in the same investment over a period of time at regular intervals. It helps to reduce the risk that you might invest all of your money at the time a price is high because you'll be purchasing the investment in portions over time.
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