Whether a tight budget or frequent financial emergencies are to blame, building a retirement nest egg can be challenging. Data analyzed by PwC Market Research Centre confirms that far too few Americans will have enough money to live on after they exit the workforce. But, it's possible to grow a sizable retirement savings balance by investing in an employer-sponsored 401(k) plan.
Here are four reasons to consider using a 401(k) plan to get a leg up on saving for retirement.
A 401(k) plan is an investment vehicle. By contributing, you're investing in assets like stocks, bonds, and mutual funds. And, when your plan diversifies into multiple asset classes, such as domestic stocks, international stocks, and corporate bonds, your portfolio becomes less sensitive to market swings - meaning it will have more stability than if you had invested all of your money into just one or two funds.
2. Tax-Deferred Growth
The money deposited into the plan grows tax-free. This means you're not required to pay taxes on the balance until you start making withdrawals. Depending on your annual income, you may contribute up to the maximum amount ($20,500 in 2022). If you're 50 or older, you can also put an extra $6,500 of catch-up contributions in your account in 2022. Your employer may set lower annual contribution limits based on plan details.
3. Lower Federal Taxes
Your retirement plan contributions are deducted from your income before taxes are calculated. This means you'll pay less in federal, state, and local taxes if you contribute. For example, if you earn $50,000 per year but contribute $10,000 to your 401(k), your taxable income is now only $40,000. You will be taxed at a rate lower than your original $50,000 salary. Consult with a knowledgeable tax advisor for guidance on your specific situation.
4. Employer Matching
Some employers may also provide matching funds up to a certain amount, so your contributions plus employer matches can be worth more over time. The match varies by participating employer. For example, Jane earns $50,000 a year at her job. She contributes 3% of her annual paycheck ($1,500) to her 401(k). Her employer matches employee contributions up to 3%. Instead of an annual 401(k) contribution of $1,500, Jane's account receives a total contribution of $3,000. The employer's matching contribution stays in the account even if Jane changes jobs. Don't miss out on this free money!
Start investing in a plan today to make the most of every dollar. The earlier you start saving, the more time your money will have to compound - earn interest on top of interest.