401(k) plans became popular as many companies did away with traditional pension plans. Employers needed something to fill the retirement savings gap. Today, the business you work for will usually match your 401(k) contributions, adding an instant retirement boost. Continue reading to explore more of the 401(k) benefits for retirement.
Businesses have a fiduciary responsibility to create a plan that serves their staff’s best interests because 401(k) plans must comply with the Employee Retirement Income Security Act (ERISA). Employers can’t push investments that maximize profits. Companies must provide important information to employees to help them make informed decisions.
ERISA also protects assets from creditors for workers. Any assets in qualified funds, such as a 401(k), can’t become garnished if there’s a judgment against a worker.
Early Withdrawals and Loans
In a perfect world, employees wouldn’t need to touch their 401(k) plans before retirement, but that’s not always the case. Typically, borrowing money from your 401(k) before age 59 and a half can result in a 10 percent tax penalty. There are provisions allowing them to become safety nets during challenging financial times.
You can usually only withdraw 50 percent of the balance, up to $50,000 total. Also, you can pay back the loan with convenient payroll deductions. If you leave your job and haven’t paid back the loan, you’ll need to cover the remaining balance before the tax filing deadline.
Many Tax Benefit Options
Depending on which plan you choose, you can pay taxes on your retirement fund now or later. In simple terms, a tax deduction is like an IRS match. If you find yourself in the 22 percent tax bracket, each contributed dollar could result in 22 cents of tax savings. In 2021, up to $19,500 of contributions were tax deductible.
Roth 401(k) plans don’t offer contribution deductions. Withdrawals after retirement are tax-free since you deposit after-tax money into the account. Both plans have tax benefits, and your circumstances should dictate the best choice.
Once you have your 401(k) plan, you can receive these incredible benefits for retirement. You just need to contribute to the 401(k) steadily. You’ll continue to save, so when the time comes for retirement, you’ll be ready.