If your employer offers a 401k plan for retirement, you have the option of taking part in it and the amount of money you put towards it each paycheck. Some people do not realize how beneficial 401k plans are, and many people do not even use the ones that are offered to them. If you are currently not using yours or not using it to the fullest, here are three reasons you may want to start maximizing your contributions to the account.
Your Contributions Are Tax-Deferred
Each contribution you make into your 401k reduces your taxable income, which means you will pay fewer taxes this year if you make contributions to your 401k. The money you put in the account will grow over time, and you will not have to pay taxes on it until you retire and begin taking withdrawals from the account. This is called tax deferral, which means you are not paying taxes on the money now, but you will later on in the future.
Even though you will pay taxes on the money in the future, you may save money in the long run. Most people are in lower tax brackets during retirement than they are while they are working. The result of this is that you will most likely pay fewer taxes on the money by deferring it until later.
Your Employer Will Match Some Of Your Contributions
One of the top reasons to maximize your contributions is to receive the employer match. This refers to money your employer will contribute to your 401k simply because you are putting money in it. This is a great incentive to save money in your 401k account.
For example, if your employer allows you to put up to 5% of your income in your 401k, the employer might offer to match up to 3%. If you put in only 3% of your income, your employer would also put in 3%, which means you are instantly doubling your contributions just by taking advantage of the offer by your employer.
You Still Get To Choose Where The Money Goes
The other important thing to understand about 401ks is that the employees get to choose where they invest their money. Your employer will not tell you that you have to put your money in a certain fund. Instead, you can choose, and this gives you control over where you are investing your money.
If you do not have a 401k at work or do not know how to use yours, contact afinancial advisor for help. Financial advisors are great at helping people save money, and they can help you create a plan that is successful for your future.