Why Do I Need to Have a 401(k)?

Many workers get a 401(k) when getting a new job. In fact, over 56% of all civilian workers (part-time and full-time) contributed to a 401(k) plan in 2023!

If you're unaware of what a 401(k) is and your employer is currently offering one, you may want to know what it means and why so many employees choose to invest in it during their careers.

To put it simply, a 401(k) plan is a retirement savings account offered by many employers and financial companies that allows you to contribute a percentage of your paycheck before taxes are taken into account. With this savings program, you don't have to worry about making manual deposits, since your employer will automatically deduct your established portion with every paycheck. Additionally, you can rest easy knowing you'll have plenty of cash for the future if you make high contributions to your savings account. 

When it comes to saving for the future, there are different types of plans to acknowledge and consider before making a deposit. With a 401(k), employers often match an amount of the money you put in your account. With a traditional IRA that you set up independently, your contributions are tax-deductible, but your withdrawals in retirement will be taxable as income. With an independent Roth IRA, your contributions are not tax-deductible, but the withdrawals will be tax-free. Keep in mind that you can have more than one type of retirement savings account! No matter which retirement plan you go with, you can start to see why it's valuable to have one while you're working on advancing your career.

 If you're asking yourself, "Do I need a 401(k)?" then the answer is no; you can save for retirement by using other strategies, like an individual retirement arrangement (IRA), a Simplified Employee Pension plan, a Thrift Savings Plan (TSP), or even pursue tax-deferred annuities. Although these saving options are available, by opening a 401(k) plan with your employer, you may find it easier to save comfortably for your retirement.

Whatever option you're interested in, it's essential to start saving money now for your future. However, if you opt for a 401(k), you can prepare yourself for a stable retirement by using a simple and advantageous method that requires very little effort on your part.

Continue reading to learn about the perks of getting a 401(k) plan and how much money you should save through this retirement savings account.

How Can a 401(k) Benefit You as an Individual?

A 401(k) can help you establish financial security for when you decide to retire from your job. However, it's important to acknowledge the different perks you can anticipate when contributing your funds to this savings account, including:

Employer Matches Your 401(k) Contributions

If you sign up for the available 401(k) plan with your company, your employer can do more than just take out your stated total for your savings account. Depending on the employer you're working with, they may decide to match your contributions towards your 401(k). Of course, the matches will vary with each organization, but employers typically match anywhere from 3% to 6% of your overall salary. What's good about that perk is that you'll have extra free cash in your account alongside your contributions that can help you grow your retirement funds over time.

Access to a 401(k) Loan

According to the Internal Revenue Service (IRS), you can withdraw money from your 401(k) account after you reach the age of 59 and a half. If you access your savings before that age requirement, you may have to pay a 10% income tax on the amount you withdrew from your account. Fortunately, you can obtain funds from your 401(k) earlier than anticipated in the form of a loan! If you're suffering from a financial crisis, you can use the cash from your 401(k) to cover your urgent expenses if you meet the applicable requirements.

Be aware that you can only get a 401(k) loan if your employer and plan allow it. If you don't have the option to withdraw money from your savings account, you can consider other loan options, like a personal loan or car title loans, to recover financially. 

Speak with a financial advisor today to seek guidance on what to do when you're struggling with an emergency expense.

Tax Benefits

As you may already know, a 401(k) permits you to make contributions to your savings account before taxes are taken into account. Because of that fact, you don't have to pay taxes on those deposits until you access your account when you retire. However, the taxes you'll get at that stage in your life may be lower than your current income taxes. If your employer offers a Roth 401(k) plan, you won't have to deal with any taxes from withdrawing from your savings account. 

No Rollover Penalties

Suppose you have a 401(k) plan with your employer, but you're getting a new job. Will you suffer a tax penalty for rolling those funds into a different account? The answer is no! You don't have to cover a fee by simply moving your money from one account to another. However, you'll owe taxes on the year you move cash from a traditional 401(k) to a Roth IRA.

It's worth mentioning that employers can automatically increase your contributions if you establish that in your plan. Additionally, you can expect to access high contribution limits, protections from creditors / federal tax liens, and convenient account management if you open a 401(k) account. Talk to your employer or potential 401(k) provider to explore the benefits that are available in your plan. 

What Amount You Should Put Into Your 401(k)?

The portion you should contribute to your 401(k) plan will differ depending on who you ask. Some financial experts agree that you should invest more than 10% of your total annual salary, while others believe you should deposit between 15% to 20%. 

The truth of the matter is that the amount will depend on a few different factors, including your budget. You can start contributing with an affordable amount and steadily grow that number based on how much money you're earning over time. If you plan to retire at a certain age, you must adjust your contribution total to meet that specific goal.

Keep in mind that elements like your age, address, and lifestyle will also influence the amount you can contribute to your savings account. Depending on your job and your income, you can decide to invest the same amount you earn now and raise that total as you get older. 

Bottom Line ─ Consider Getting a 401(k) for Your Retirement

Everyone would like to live their golden years peacefully and without any stress. However, you can ensure you'll have a stable retirement by signing up for your company's available 401(k) plan! Just speak with your employer before enrolling and calculate an amount you can comfortably contribute throughout your career.