401k Benefits and Competing Investment Choices

By comparing 401k benefits to the benefits of other retirement accounts, you can determine which type of account is best for you. Each type of retirement account that is available has some unique features that could be beneficial depending on your situation. Here are a few benefits of the 401k and competing investment choices.

1. Tax-Deductible Contributions

One of the biggest benefits of the 401k is the ability to make tax-deductible contributions. With this type of account, you can take a certain percentage out of your paycheck for every pay period. This allows you to increase the amount of money that you can save for retirement. Other retirement accounts also offer the ability to make tax-deductible contributions. The IRA, simple IRA, and SEP IRA all offer this feature. By comparison, the Roth IRA and Roth 401k do not allow tax-deductible contributions. They are funded with after-tax money and you do not have to pay taxes when you withdraw the money.

2. High Contribution Limits

The 401k has one of the highest contribution limits for any retirement account. You can contribute as much as $16,500 in a single year out of your paycheck. If you are above the age of 50, you can contribute a maximum of $22,000 per year. This is much more than you can contribute with an IRA. With either a Roth or traditional IRA, you can only contribute $5000 per year. This total is bumped up to $6000 if you are over the age of 50. A simple IRA allows you to put in $11,500 or $14,000 if you are above 50. The SEP IRA has a maximum of $49,000 per year but the contribution amount is decided by the employer and it is based on a maximum of 25% of your income.

3. Employer Match

Another huge benefit that comes with investing in a 401k is the employer match. Employers are allowed to contribute money to your retirement account at the end of the year. In most cases, they will match a certain percentage of what you put in to the account. For example, they might provide a 50% match on your contributions up to 6% of your income. By comparison, the IRA or Roth IRA does not provide this benefit. With a SEP IRA, the employer can also provide contributions of up to 25% of your income. With a simple IRA, the employer can choose to contribute an elective amount up to 3% or a non-elective contribution of 2%.

4. Tax Deferred Gains

When you invest money into a 401k, you will be able to use that money to purchase securities. You can buy securities off of the list of approved investments from your account provider. This might include stocks, bonds, and mutual funds. The gains that you make from these investments do not incur any tax liability. This allows you to accumulate your retirement savings faster. You will not pay taxes on the money until you start taking withdrawals once you reach retirement. The IRA, simple IRA, and SEP IRA offer this feature as well. With the Roth IRA and Roth 401k, you will not ever pay taxes on the gains even when you reach retirement.

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