Unlike their other savings plans, employees make contributions to their 401(k)s directly from their salaries. Their employers can make matching contributions.
This is how a 401k plan works.
So, a 401(k) will reduce the amount you see on the bottom line of your pay slip by putting money aside for your retirement. It will also deliver tax advantages. Depending on the type of 401(k) you’re using, you’ll either pay your taxes before investing in the 401(k) but not have to pay tax when you withdraw the funds. Or you’ll put money in the 401(k) before paying tax but you’ll have to pay taxes when you retire and make withdrawals.
Because employers deduct 401(k) payments directly from salaries, you won’t notice the money coming out of your pay slip and moving into your 401(k). The danger, though, is that you also won’t notice the money your employer can add to that fund. That’s extra income that you can miss if you’re only looking at the bottom line.
401(k) contributions might not be pay that you can spend right now but it can boost your income. It’s money that you will be able to spend in the future—and because of the tax benefits, it can be worth a lot more when you receive it.
- What Is a 401(k)?
- How a 401k Plan Works
- 401k Contribution Limits
- The Difference Between a 401(k) and a Pension
- The Benefits of a 401k
- Four Alternative 401(k) Plans
- How Employers Should Choose a 401(k)
- What Is an Indexed Annuity?
- 5 Questions Employees Should Ask Before Choosing a 401(k)
- Contributing to Your 401(k) Plan
- Contribution Limits
- Matching Contributions
- Your Age
- How to Set Your 401(k) Contribution Targets
- Calculating Your Social Security Benefits
- What’s In Your 401k Plan?
- Track Your 401(k)
- The Present and Future Value of Your 401(k) and Why You Need to Know Them
- Rolling Over Your 401(k)
- You Don’t Have to Rollover Today
- Moving Your 401(k) to Your New Employer With a Direct Rollover
- Moving Your 401(k) to Your New Employer With a 60-Day Rollover
- Borrowing Funds from Your 401(k)
- Lend Yourself Interest-Free 401(k) Funds
- Borrowing from Your 401(k) to Buy a Home