Why Should I Have a 401(k)?

There are many potential benefits to using a 401(k) for retirement savings.

You can break down the primary benefits of a 401(k) to 3 things:

1) Tax-Deferred Growth: This is probably the most advantageous aspect of a 401(k).

Not only is the money contributed to the account pre-tax, which lowers your current taxable income, but the money also grows without being taxed within the account. The effect produced by the tax-deferred growth is much more powerful than most imagine.

2) Employer Contributions: Essentially, this is free money.

Although the amount your employer contributes to your account may have to be vested over a certain period of time before you technically own it, it still remains free, pre-tax money. This may be done with a matching contribution or a flat, non-elective contribution.

It is not required that employers make contributions at all, so you will need to make sure your plan does. If so, most advisors would tell you to fund your 401(k) up to the matched amount, because it is nearly impossible to beat that that kind of return in any other kind of scenario or investment vehicle.

3) Convenience:

Since your money is deducted from your paycheck automatically, it is much less painful or noticeable than if you had to physically deduct the money from your bank account and contribute yourself, which might require continuous budgeting.

People statistically save far less, and are much more likely to stop contributing for significant amounts of time, if they have to contribute from their personal checking accounts. So this is about more than just convenience; this mechanical factor can make or break someone’s retirement nest egg.