Why you should contribute to your 401k

It is a shame that the people who can most benefit from contributing to their 401k or retirement account are the ones who contribute the least. People of lower incomes with the highest level of tax benefits related to contributing to their 401k are also the ones who make the least use of them. It is also low income earners who are most likely to beed this cushion of cash when they are older. While it can be difficult to contribute monthly to your retirement account we do recommend you at least deposit the change in your pocket even if just to claim the tax benefits.

Tax Benefits

  1. If you are a low to middle income earner and you are under the age of 50 you can deposit up to $5000 a year tax free into your 401k or retirement account. Any additional contributions are taxed at the regular rate. If you are over 50 you can deposit an additional $1000 tax free.
  2. Many states have tax deductions from contributing to your 401k account if the deduction was accepted by the IRS on federal taxes.
  3. While contributions to your 401k can be taxed at regular rates if you are a high income earner the capital gains generated from your contribution are not. What this means is that your money can grow within your account as interest or capital gains without being taxed as income.

Reasons to contribute

  1. A lot of jobs no longer contribute to your retirement account in order to cut costs which leaves the responsibility of planning for retirement entirely on the employee’s hands. Most people are aware that they should save for retirement but always put it off until it is already too late to do something about it.
  2. As inflation rises so will the cost of everyday goods and healthcare while your earnings potential will likely get smaller.
  3. Contributing to your 401k can help you fend off unexpected costs from medical complications in your future
  4. Money from your 401k can be withdrawn before age 59 at a 10% penalty although we highly recommend against this. After age 59 the money can be taken out penalty free if you ever need it.


Posted Saturday, April 20th, 2013 under Personal finance.

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