As I posted yesterday, my local newspaper recently printed a two-page article titled Nurturing Your Nest Egg. It was full of great tips on making the most of your 401k. Today, I'd like to share their listing of a few reasons why 401ks work:
- Tax deferred. Investing money before it is taxed lets savings build faster and defers taxes until you are presumably in a lower tax bracket in retirement.
- Company match. Consider it a raise without having to do any extra work.
- Automatic payroll deduction. You don't see it, so you won't spend it.
- Emergency access. You can dip into your account balance for a loan or a withdrawal in an emergency.
- Portable. You don't lose your money if you change jobs. You can shift to another tax-deferred savings plan.
Reasons #1 and #2 alone make 401ks a no-brainer. At a minimum you should be putting in all you can into your 401k to fully maximize the company match. Ideally, you should be contributing the full amount into your 401k every year.
I love 401k's-and they work very well but let me give you food for thought. You can get all the same benefits by making after tax contributions. Yes, you loose the tax break but when you are fifty something you are living large because you don't have the tax burden!
Posted by: Steve Mertz | July 13, 2005 at 10:17 AM
Great post! I must have missed this one. I have you on my blog reader to read your updates, just need to go through your archives more thoroughly. Your blog is one of my favorites!
Posted by: book finance | February 26, 2007 at 06:57 PM
Yes I like 401K's too but I limit it to as much as company matches, no more. Incidentally, yesterday I moved my future contribution to after-tax. I think when it is time to take the money out at age 66, my tax rate would be higher than my current 12% (mortgage and family of 2 kids). Whether it is pre or post tax, the money will grow at more or less similar rate. So why pay 25+% tax in future? Is my thinking sound?
Posted by: aks | May 07, 2008 at 08:47 PM