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Participating in your employer 401(k)
American Middle Class

Top 3 Reasons to Participate In Your Employer 401(k)

The estimated reading time for this post is 140 seconds

  • Participating in your employer’s 401(k) plan is the most convenient way to save for retirement

  • Your employer 401(k) lets you save part of your pay before federal and state income taxes are withheld.

  • The standard employer 401(k) match is 50 percent of the employee’s contribution up to 6 percent.

  • Once you enrolled in the plan, the contribution is taken out of your paycheck automatically.

  • Visit the Financial Middle-Class homepage for more stories

Participating in your employer’s 401(k) plan is the most convenient way to save for retirement.  Companies started making the switch from defined-benefit plans (pensions) to defined-contribution plans since the 80s.  401(k) is the premier defined-contribution plan.

Nearly four decades later, 401(k) is the most popular savings vehicle available at the workplace.  Besides its great benefits, many employees choose not to participate in their employer’s plan.

According to Fidelity, the nation’s largest retirement-plan provider, an overwhelming number of millennials don’t participate in their employer’s 401(k)

Employees, who have access to a 401(k) plan at their job and choose not to participate, are potentially leaving money on the table. 

Also, they are missing out on timing and compounding, which are two of the most potent factors in building wealth.

What Is 401(k)

401(k) is a defined-contribution plan sponsored by your employer. It has excellent tax-advantage and provides employees a vehicle to save for retirement. Here are the top 3 reasons to participate in your employer 401(k)

Tax Benefits

Let’s say that you are making $50,000 per year and you are in the 25% tax bracket, your federal and state income taxes will be around $12,500 ($50,000×0.25) at the end of the year. Your employer 401(k) lets you save part of your pay before federal and state income taxes are withheld.

Using that same example above, if you contribute 10% of your pay to your 401(k), your taxes will be around $11,250 ($45,000x.25), and you put away $5,000 for retirement.

You have to pay taxes once you start taking required minimum distributions (RDMs), but your tax bracket will most likely be lower than 25% percent at that time.

Employer Match

Many employers that offer 401(k) will contribute a certain amount or percentage of the employee’s contribution.  The standard employer 401(k) match is 50 percent of the employee’s contribution up to 6 percent.

In the above example, your employer will add $1,500 (($50,000.06)/2) to your savings.  Numerous financial experts advise employees to contribute up to their employer’s match.  

That advice is not accurate. 401(k) provides you a convenient way to save; you should contribute as much as you can in the plan.

Automatic Savings

Once you enrolled in the plan, the contribution is taken out of your paycheck automatically. 

Your employer match is added to your account every year. In our above example, you could save up to $6,500 each year without realizing it

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