Why 401 k is important

It is intended to promote awareness and is for educational purposes only. The specific applications and services noted are not necessarily endorsed by John Hancock or any of its affiliated businesses. Boston, MA Your browser is not supported. To use our website, we recommend using the latest version of Microsoft Edge, Chrome, or Safari. Here are 5 benefits of most traditional k plans:.

Tax advantages Contributions to a traditional k are taken directly out of your paycheck before federal income taxes are withheld. You are in control You can contribute as much or as little as you want to your account subject to plan and IRS limits. Time is on your side The earlier you start investing, the more time your money has to grow.

With a k , you are in effect paying yourself first — with money that otherwise would have been spent. Year over year and that can add up to big savings. Of course, the earlier you start, the bigger your k can grow. The more your employer matches, the less you have to save on your own.

Always take advantage of an employer match and contribute at least the amount they will match. Icon works like a k plan but without the cost, complexity, and administrative burden.

And, like Sandra Kessler, after a while most people don't miss the money. Choose the percentage of pay, recommends Brian Mattson, consulting actuary with Watson Wyatt Worldwide. You get free money with an employer match. Over 70 percent of plans offered some kind of matching contribution to encourage participation. If your plan is among them, don't pass up this freebie. You get two tax breaks when you save in a k plan. First, your contributions are tax-deductible. The money you contribute doesn't count toward your gross income for the year, lowering your taxable income.

Second, your money grows tax-deferred. If you saved money in a savings account or brokerage account you would have to pay taxes on your interest or dividends at the end of the year. With a k plan, your earnings are rolled back into the plan and don't have to be listed as income on your tax return until you withdraw them.

Your savings grow faster this way. Three More: Good Strategies 4. Interest compounding. This can be a difficult concept for new k savers to grasp, but it's what makes a k plan a powerful savings tool. Put simply, your earnings are plowed back in to the account so you earn interest on your original principal plus interest.

Over the short term, the gains can appear small. Get Started Now. Why Your k or b Matters More Than You Think Your grandparents—and even some of your parents—had it pretty easy when it came to saving for retirement. Reduce your tax burden today Because you make contributions to a traditional k or b on a pretax basis, they essentially lower your taxable income. Of course, taxes must be paid. You will owe taxes when you withdraw your money upon reaching retirement age, but theoretically your tax bracket may be lower than it is today.

That is, many employers will match part or all of your k or b contributions. Plus, the longer you invest, the less impact you will feel from any short-term volatility in your portfolio.