The goal of a 401(k), like any retirement plan, is to ensure that workers save money for the future. It forces workers to put money aside so that they’ll have funds when they retire.
To encourage people to put aside money that they’d probably like to spend now, the government offers tax benefits for funds paid into a 401(k). So if you’re earning a high income now—and paying a high rate of tax—but you expect that your tax rate will be lower after you’ve retired, then your 401(k) can save you a significant amount of money.
Someone paying the top rate of income tax might be able to spare putting $19,000 into their 401(k) each year, for example. Instead of giving 37 percent of that amount to the government in income tax, they could put into their 401(k) and they may only have to give 10 percent to the IRS when their take it out. They’re have saved more than $5,000 each year.
401(k) plans also have employer matching contributions. As we’ll see, those contributions don’t have to be one-to-one but they do provide important extra income that you can use in the future.
- 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