401(k)s can be good for you!
An opportunity to save more
Experts estimate that you'll need between 60 and 80 percent of your pre-retirement
income to live comfortably after you leave the work world behind. Sure, you could
open an IRA. But you'll be able to contribute far more – over three times
as much – to your nest egg with a 401(k).
Currently, federal laws limit your IRA contributions to just
per year. With a 401(k), you could be contributing as much as
per year. If you're 50 or older, you're allowed to make an annual "catch-up" contribution of
That's as much as
per year you could put towards retirement.
Are you self-employed? Even better. Self-employed owners can contribute a whopping
annually to a 401(k)!
All that money in your 401(k) can grow on a tax-deferred basis (or tax-free in the
case of a Roth 401(k)). Don't forget
that the earnings are compounding as well.
See how compounding can really make a difference for you
This example compares how a one-time investment of $1,000 can grow over time assuming
an 8.0% fixed annual rate of return. Your account may earn more or less. This is
a hypothetical example only, and not a guarantee of future returns. Actual experience
will vary with portfolio selections and changing market conditions. The total account
balance does not take into account federal and state income taxes, which will be
due upon withdrawal. Assets withdrawn before 59½ may incur a 10% tax penalty.
The ability to lower your personal taxes
Not only does a 401(k) allow you and your employees to sock away more money for
retirement, it also allows you to shelter those funds from taxes – with the
government's blessing, of course. You have two options:
- With a traditional 401(k), any contributions you and your company make – plus
any gains those funds earn – won't be taxed until you withdraw them in retirement.
Saving on a tax-deferred basis minimizes the impact on your paycheck now.
- The Roth 401(k) works in reverse. You pay taxes on your contributions now, but those
funds and any gains earned can be withdrawn tax free at retirement! With a Roth,
your paycheck will take a bigger hit today, but you may stand to benefit later.
Either way you go, it's a win-win tax situation for you (and any employees).
Access to funds in a pinch
Here's another benefit you don't get with an IRA: immediate access to your money
when you really need it, with no penalties.
Of course, you don't want to remove money from your retirement nest egg unless it's
truly necessary. But with a 401(k), at least you have the option of doing so. You
can loan yourself as much as $50,000 from your 401(k) savings, and as long as you
pay it back as agreed, there are no tax penalties to contend with. Even the interest
you pay on the loan goes back into your account.
Note that if you were to terminate your 401(k) without repaying the loan in full,
there would be tax penalties – typically a 10% surcharge. Employees who choose
this option should be careful: if their employment with the company were to end,
any outstanding balances on their 401(k) loan would become due soon thereafter.
Matching and profit-sharing options
Contrary to popular belief, it's not a requirement that your company offer employees
a matching contribution program with your 401(k) — it's an option. But if
you decide to do so, you can reap the benefits personally as well. It's the same
story if you decide to offer your employees 401(k) profit-sharing: you get a cut
of the profits too (and a corporate tax deduction).
Note that owners
' and key employees' personal contributions may be limited in the
absence of a match or Safe Harbor plan.
Next: read about company benefits
or see ShareBuilder 401k's plan options.