Understanding How 401k Tax Rules Help Your Retirement

When saving for retirement, 401k tax rules can be of significant help. Here is a look at how 401k tax rules can be beneficial to you.

Contribute More

With the 401k account, you can contribute money without paying any income tax first. Therefore, you can set aside a portion of your paycheck and transfer it directly into your account. This will allow you to contribute more money to your retirement than you normally would be able to.

Time Value of Money

Being able to contribute more money up front provides you with the advantage of the time value of money. This theory basically means that a dollar today is worth more than a dollar a year from now. Since you are getting more money out of your paycheck to contribute, you are able to invest more into the financial markets. Since you are investing the money now, you will be able to earn interest on that investment. Therefore, by putting the money into the financial markets as soon as possible, you will be able to compound the returns over time. This is what makes it possible for the average person to retire comfortably. You can contribute money without paying taxes and then pay taxes later whenever you withdraw the money.

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