Founded 44 years ago with the passage of the Revenue Act of 1978, 401(k) plans have largely replaced traditional pension plans as the standard retirement plan in the United States. Over 100 million Americans are covered by the roughly 600,000 plans offered by private employers.
As popular as they are, 401(k)s are one of the least talked about savings vehicles as they rarely make headlines, and commercials encouraging you to invest in your 401(k) are nearly nonexistent. While 401(k)s are not the most exciting investment vehicle, they are one of the most effective.
5 Reasons Why 401(k)s Are Still One of the Best Savings Vehicles Available:
- Simplicity: We all want to simplify our lives. 401(k) plans are one of the easiest ways to save and invest. Once you enroll in your employer’s plan, money is automatically deducted from your paycheck and invested. Plans are making it even easier with an auto-enrollment feature that automatically enrolls you into the plan and starts deducting money from your paycheck at a set savings rate and investing in an age-based investment option.
- Tax Savings: Traditional 401(k) contributions are tax-deductible. Your contribution is deducted from your paycheck and invested into your 401(k) before it is ever taxed, lowering your tax liability. For example, if you earn $35,000 and contribute $5,000 to your 401(k), you are only taxed on $30,000. You will pay taxes when you withdraw the funds in retirement hopefully at a lower tax rate. You’ll pay less in taxes now and may even drop into a lower tax bracket by contributing to your 401(k).
- Consistent Investing: Emotions are the enemy of successful investing and investment results are more dependent on investor behavior than investment performance. Over the last 30 years, the average stock investor has underperformed the market by over 3.5% per year due to adverse emotional decisions. 401(k) contributions can remove this emotional downfall by consistently investing over time regardless of how the market is performing.
- Employer Contribution: Over 90% of 401(k) plans offer a matching contribution. Your employer will match whatever you contribute to your 401(k) up to a certain percentage. This match is an incentive for employees to invest in the plan and save for their retirement. With the average match of 4%, an employee making $50,000 will receive a $2,000 contribution from their employer for contributing at least 4% to their plan. This is a $2,000 bonus just for saving for retirement.
- Roth Savings: While Roth IRAs are still the most well-known type of Roth account, 77% of 401(k) plans offer a Roth savings option. Instead of receiving a tax-deduction upfront, a Roth allows you to pay taxes on your contribution and withdraw the money tax-free in retirement. Roth 401(k)s are advantageous when compared to Roth IRAs because they have no income limits and much higher contribution limits.
About the Author
"Investing in your 401(k) is easy, efficient, and effective. You’re able to save money on taxes and may even get paid a bonus for saving for retirement." - Ethan Cooper, CFP®, Client Advisor
Ethan serves as a client advisor working closely with clients to deliver customized financial planning, risk management, and tax planning solutions to help them achieve their goals. He is honored to be a trusted partner in client's financial plans, including retirement and 401(k) planning.
How Mission Wealth Can Help
Every 401(k) plan is unique. The investment options and plan features vary by plan. Mission Wealth can review the details of your plan to ensure that you are utilizing it to reach your financial goals. Sit down with one of our advisors and see how your 401(k) fits into your financial picture.
MISSION WEALTH IS A REGISTERED INVESTMENT ADVISER. THIS DOCUMENT IS SOLELY FOR INFORMATIONAL PURPOSES, NO INVESTMENTS ARE RECOMMENDED. ADVISORY SERVICES ARE ONLY OFFERED TO CLIENTS OR PROSPECTIVE CLIENTS WHERE MISSION WEALTH AND ITS REPRESENTATIVES ARE PROPERLY LICENSED OR EXEMPT FROM LICENSURE. NO ADVICE MAY BE RENDERED BY MISSION WEALTH UNLESS A CLIENT SERVICE AGREEMENT IS IN PLACE.