While 401(k) plans continue to be the wise choice among Americans, it is strange to find that not everyone advocates the plans. As the contributions to the plans are tax-free, and taken directly from our earnings, this represents an easy way to develop a nest egg for the future.
Given the fact that 410(k)s are generally considered to be the easiest way to save for the future, it is surprising that only 32% of Americans contribute in this way. While this method of saving is driven by employers, the fact that not all companies provide them could account for the small return. In an ideal world, this would not be the case. With companies such as Blooom revolutionizing the way 401k(s) are managed, the argument for more individuals and employers to get on board with this type of saving has never been stronger.
What is a 401(k)?
The 401(k) takes its name from the Internal Revenue Code 401. This type of savings plan is designed to be a contribution plan which is, in turn, sponsored by employers. Providing the company you work for offers 401(k)s to customers, you can allow for a percentage of your salary to be paid directly into savings.
In 2018, the limit on how much you can defer from your salary is $18,500, which was raised from $18,000. Over 50s can save more money by triggering a “catch-up” contribution, which is limited to $6,000 a year, meaning that the total they can save is $24,500.
The IRS limits the amount you can invest in a 401(k). In 2016, the 401(k) contribution limit is $18,000. However, people 50 or older who expect to hit the 401(k) elective deferral limit can contribute an additional sum of up to $6,000 for a total of $24,000. This is known as the catch-up contribution limit. When the services of a company like Blooom, for example, you can get a full grasp of the potential of your savings.
What makes a 401(k) so effective?
Typically, you can expect your 401(k) plan to provide opportunities and various options. Automatic enrollment, low-cost index fund options, and limits indexed to inflation means as inflation increases, you will have the scope to provide bigger amounts to your plan. What is important to consider is that – should you withdraw from your 401(k) before you reach retirement age – you can expect to lose 10% as a penalty fee, and incur additional taxes.
How can I benefit from a 401(k)?
Blooom provides a service which breaks down the benefits of a 401(k) plan. First off, you can avail of some excellent tax-free benefits. As the sum of your contribution will not incur current federal income tax, it effectively lowers your taxable income, too. Dividends and capital gains attributable to your 401(k) do not incur taxes until you proceed to withdrawing from the plan.
Looking for some free money? If your employer commits to matching contributions to your 401(k) plan, you could see your contributions doubled, or topped up by another 50%. Another notable bonus of 401(k)s is that you are entitled to keep contributing to the plan as long as you want providing you are still in active employment.
401(k)s are simple but very effective
The easy nature of 401(k)s can even be enhanced further by a number of companies which specialize in the savings plan. Blooom, as previously mentioned, offers a fantastic and time-efficient means to manage your savings. Learning about the numerous benefits and advantages available to you should you chose a 401(k) will be much easier with expert advice, so clue up and start planning for your future.