Five Reasons You'll Love a 401k

Consider this a "basic" personal finance post. I know many of you reading it will be far beyond this topic, but I also know that many people who read Free Money Finance are new to personal finance and haven't read the other 4,500 posts I've written to date. With that said, let's explore a recent piece touting the great benefits of 401ks.

This article is from Kiplinger's and lists five reasons you'll love a 401k:

1. It could make you a millionaire.
2. Your employer may give you free money.
3. It's a low-maintenance relationship.
4. You don't have to remember to make deposits.
5. You'll have fewer taxes taken from your paycheck each month.

My (even shorter) summary:

1. It makes you money (both in employer matches and long-term earnings).
2. It saves you money (on taxes).
3. It's easy to participate.

What isn't there to love? I especially like the free money of the employer match -- where else can you earn 50% to 100% return on your money?

I've maxed out my 401k for years now and the amounts I have saved from them (I have a 401k as well as an IRA rolled over from previous jobs' 401ks) is amazing. In addition, I'm adding more to this amount each pay period and all these funds still have 25 years or so to compound. If I can earn 10% on them, they'll double every seven years or so, so I'll be looking at many, many times with I currently have now even if I don't put in another penny (which I will.)

As I'm sure you can tell, I LOVE 401ks and recommend them to everyone who will listen!

For more on this issue, see these posts:

• Americans Lose $30 Billion a Year by Under-Utilizing 401ks

• Three 401k Mistakes to Avoid

• 10 Retirement Pitfalls, Pitfall #3: Missing 401k Matches

Comments

[thomas]

Why can't 401k payments become mandatory like Social Security? Throwing away free money is just sad.

[GeckoGirl]

Actually, I believe the new legislation that passed has employers automatically sign up (new) employees for a 401(k). The employee has to explicitly opt out if they don't want to participate.

[Laura]

I'm graduating in December and I'm interviewing for jobs right now. Besides finding a job I love, I'm looking at how benefits that they offer. Thanks for putting up this post. I want to make smart decisions now and worr less in the future.

[Mrs. Micah]

Sounds like you're doing great, congrats! If all goes well, I should be eligible for a 401(k) in the new year. Looking forward to it. :-)

[Compounding]

Now, now... we don't need to go about forcing people to use 401(k)s. Obviously, it is a wise thing to do, but we have a little thing called freedom. On that same note, as much as I take advantage of retirement accounts, why do we have to get permission from the government to save for retirement with special accounts that they create through legislation? Stay out government, thanks.

[Joey]

Compounding:

Good point. 401k's, while one of the best alternatives available for retirement savings, are structured such that Uncle Sam and the investment industry benefit more than the average joe. Were the government really concerned about our retirement, they would eliminate capital gains taxes, passive income taxes, and estate taxes, and let people truly build wealth.

I felt the same way about the President's Social Security Savings Plans - another cleverly designed idea advertised as a benefit for the average joe.

I think government should keep its nose out of it, thank you.

I'm toiling for every miserable dollar I get, and I'm scratching my head (heartbreak o psoriasis) wondering why on earth UNEARNED income should get a preferential tax rate, nopt to mention a zero tax rate.

[Nick]

I also love 401(k)s and suggest to everyone that then invest in them but your shorter summary is a bit misleading:

1. 401(k)s are typically invested in unsecured vehicles and, like any other type of investment, are not guaranteed to make you any money. Those who had their money in a 401(k) during the internet bust likely lost money. Also, the investment options in a 401(k) are typically not as varied as you would get in an IRA or in a brokerage account.

2. 401(k)s are tax deferred investments and only save you money on taxes if your tax rate in the future is lower than your current rate. If you are at the beginning of your working career and don't have a high income or if you have a large number of other deductions, you will probably have a higher tax rate when you withdraw in the future.

3. Typically, it is easy to participate in a 401(k) but in small to medium sized companies that don't have structured HR or finance departments, like the couples that I have worked for recently, it can be a head ache to get the paperwork together and to get the proper amount taken out of your paycheck.

[Aaron]

The 401k is very underutilized in this country. It and the Roth IRA are investments that everyone should be making whenever the opportunity presents itself. The tax and retirement advantages these investments have are tremendous.

[William Huber]

My position where I had worked for almost 38 years, was eliminated last Monday. Like millions of others in the USA we lived from paycheck to paycheck. I have a First mortgage of $140,000 and a second of $40,000. My home is worth around $160,000. I have around $50,000 in a 401K and am over 55 years of age. I think I would like to take the $50K and at least pay off the 2nd. That way if it comes to selling the house, I should at least get enough for it to pay off the 1st. And if I'm lucky be able to pay down all if not most of any credit card debt. It has only been a week but for someone that is almost 58 and has worked at the same place since he was 19, it may be very difficult to find a position that meets my qualifications and comes close to the $65K I was earning. Can you let me know if this is an advisable plan. BILL

[D]

yeah my new job offers these benefits. but if u do not sign up before the deadline, my company automatically enrolls 4% of my earnings towards my savings. so us workers are getting taken care of. but if you want to retire rich, do it yourself before the deadline, if applicable.