Enhance Your Retirement Savings by contributing to a 401(k) plan
You're trying to save for retirement and you've heard that a 401(k) plan is a good way to start. But what about your regular savings? Maybe you think your regular savings account does the same job. A savings account can help you save for retirement, but it doesn't offer tax-deferred interest like 401(k).
401(k) or regular savings account?
If you earn $15,000 a year and save $1,000 for your retirement in a regular savings account, you pay taxes today on the full $15,000 of income.
If you contribute $1,000 under the 401(k) plan, that $1,000 is subtracted from your total pay before you figure your taxes.
Big deal? Yes it is, as this chart illustrates:
For illustrative purposes only.
Choosing to participate in the 401(k) plan increases your take-home pay by $150 and you still have $1,000 in savings.
The more you contribute through a 401(k) plan, the less taxes you pay today. And the more you save, the faster your tax-deferred interest grows too.
The chart below tells you what the tax savings might be with a 401(k) plan.
For illustrative purposes only.
Don't ditch your savings account
There's a lot of benefits to saving for retirement with a 401(k) plan, but you should still hold onto your savings account. For short-term goals, like buying a house or a car, a regular savings account can be the way to go. Tapping your employer's 401(k) plan before you reach 59-1/2 can trigger a 10 percent penalty on your withdrawal, as well as income taxes on the distribution.
Your employer's 401(k) plan, on the other hand, is an ideal vehicle for retirement savings. You can let the retirement funds accumulate tax free for years (or even decades) expecting that the funds will be there when you need it most*.
*No investment strategy, can guarantee a profit or protect against loss in periods of declining values.
Take the next step...
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