401k Benefits

Oct 24th, 2008 | Filed under: Investing Moment, Video

Most investors know what a what a 401(k) plan is, but many aren’t sure why they should consider one. After all, retirement may seem far away, and current expenses may seem more pressing.

It’s true that a 401(k) plan is designed to help you save for retirement. But it can also benefit you today. Let’s look at all of these advantages.

First, when you contribute money to a 401(k) plan, your income is reduced by the amount of the contribution—and that can decrease your income taxes.

Second, the money you put in a 401(k) plan grows, untaxed, until it’s withdrawn. That’s different from most investment accounts, where you have to pay taxes on interest, dividends and capital gains. So, with a 401(k) plan, you could experience higher overall investment returns. This can really add up, particularly if you’re a young worker with several decades to contribute.

Finally, when you do withdraw the money from your 401(k) plan, you’ll probably be in retirement, in which case you could be in a lower tax bracket—minimizing the taxes you have to pay on withdrawals.

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