401(k) plans are one of the most popular and successful retirement saving tools. Here are two of the most important benefits:
Tax planning.
A traditional 401(k) plan reduces an employee’s immediate taxable income because contributions are tax-deferred. Many participants anticipate being in a lower tax bracket in retirement compared to their peak earning years, which may result in lower tax rates on 401(k) plan withdrawals in retirement. However, some participants, such as young employees with many working years ahead of them, may anticipate being in a higher tax bracket at retirement. If the 401(k) plan offers Roth 401(k) plan accounts, these participants can choose to pay tax on their contributions up front and pay no tax upon withdrawal. The ability to set aside some of their income on a tax-deferred basis, and in some cases to determine how their own contributions are allocated between a traditional and Roth 401(k), is just one way that 401(k) plans allow plan participants flexibility in tax planning for retirement.
Tax-deferred growth. The money saved in a 401(k) plan grows and compounds more quickly because the total balance in the account isn’t taxed on a yearly basis.
Employer match.
Many 401(k) plan participants can increase their savings by taking advantage of an employer match—an additional contribution made by the employer that depends on how much the employee contributes.
In addition to those benefits, 401(k) plans are especially well suited for today’s economy because they are portable, employees have full ownership of their vested contributions and investment returns, and the 401(k) industry is constantly innovating to ensure that it keeps up with an evolving job market and workforce.
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