Should I Invest in a 401K Plan?

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Kimberly Joyce

Many people ask me the question, "Should I invest in a 401K plan?" The answer YES! This is not a financial blog and I’m not going to give you advice on how to invest but if your company has a 401K plan for you to participate; you should take advantage and do so!

What is a 401K plan?

The name 401(k), comes from the section in the Internal Revenue Code (written by the IRS) which specifies the use of this type of contribution plan that allows employees to make pre-tax contributions. Generally, 401K plans are known to be a type of retirement savings plan that employers can choose to set up for their employees.  Any contributions an employee makes into the 401K plan, is automatically deducted from their paycheck each pay period before taxes are taken out.  Employee contributions are then invested, at their choosing, into one or more funds provided in the plan. Some employers may choose to match the funds the employee invests in, others may just have a plan to participate in. Either way, the 401K plan is a win-win for the employer and employee; the employer costs for the plan are tax deductible (meaning, this amount can be used to lower taxable income) and the employee contributions are tax deferred (meaning, taxes are not paid out until a future date or in this case, not paid until withdrawal of funds at retirement age).

Why should you invest in a 401K plan?

1. More Money Later

Your contributions that you put into the plan, grow tax deferred until you withdraw them at retirement. Your dollars will grow quicker, allowing you to have more real dollars in the bank when you retire. Looking to sail the waters or live on the beach when you retire – start putting money away now so you won’t have to worry about your retirement when you retire. It’s NEVER too late but starting earlier means more $$$ later.

2. You’re in Control of Your future

You have full control over your savings that you put into the 401K plan. You have the flexibility to choose how you would like to allocate your savings: money market, bonds, stocks, etc. any way you choose!

3. You Won’t Feel a Thing

Out of sight, out of mind – if you start investing through payroll deductions which come out of your paycheck, you are more likely of getting in the routine and will not even notice that you are growing your savings for your future.

4. No Additional Cost to You

No administration costs to you, if your employer does payroll deductions. Another savings!

5. Penalty Free

Your retirement plan is portable, meaning if you switch companies/employers, you can rollover your savings into your new company’s 401K plan or into an IRA (Individual Retirement Account) without paying any penalties.

6. Free Financial Guidance

Access to 401K financial guidance for free! Most employer 401K plans have a 401K Financial advisor that help the company establish the plan and put together appropriate funds. Legally, HR cannot give you guidance on how you should invest but the 401k Financial Advisor can answer questions about different funds to invest, how to invest or provide your steps that will guide you in the right direction to meet your retirement goal. This information is free which is a huge perk!

These are just a few reasons or benefits to investing in a 401K, but the most important reason/ benefit of why you should invest in a 401K plan, is that you will be saving for your future! And, when the time comes, you won’t have to worry about working ...IF you’re lucky!

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Kimberly Joyce

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