Talk With a Minnesota 401K Advisor
Sensible retirement financial planning must always encompass three options—government-provided plans, employer-sponsored benefits, and personal investments and savings. In theory, Social Security is a sound option for retirement planning. However, you will end up at the mercy of erratic government policies and macro-economic conditions if you rely solely on Social Security and pension plans.
This is why a strategy that combines personal savings with an employer-sponsored 401(k) plan is a great idea. A retirement plan incorporating 401(k) investments will help you enjoy fantastic tax savings even as you lay the foundation for a financially-stable retired life.
The benefits of investing in a 401(k) plan include:
- Double contribution into your retirement fund. Your retirement fund will enjoy double contributions—from you and from your employer. Normally, employers contribute around 50% of the employee’s contributions to the 401(k) fund. So, if you allocate 6% of your annual income towards your retirement kitty, then the employer will add another 3% to the fund. If you are earning $50,000 and contributing around $3,000 per annum, then your employer will add another $1,500 to your savings.Ignoring this option is equivalent to giving up free cash that is added to your retirement funds, without any strings attached. Of course, 401(k) makes sense even if you don’t enjoy the facility of additional contributions from your employer.
- A deferment of tax liability. Governments offer generous tax benefits to those who save more. So, allocating a part of your income to the 401(k) plan will help you enjoy tax savings that may not be available to others. As you are probably aware, your final tax liability is calculated on your taxable income, which is calculated by subtracting specific deductions from your gross annual income.401(k) contributions can be deducted from your net taxable income, which will automatically reduce your overall tax liability. You will pay tax on their 401(k) contributions only when you withdraw money from the fund upon reaching the legal age of retirement.So, this investment option allows you to use money that otherwise would have been paid to the tax authorities to generate significant returns throughout your productive life. Since retired individuals pay tax at a lower rate, deferring your tax liability by investing in 401(k) plans guarantee fantastic tax savings over the long run.
- A convenient loan option. You can borrow money from your 401(k) account to meet specific expenses like the purchase of a primary residence, repayment of an educational loan or for payment of medical expenses. Unlike other loan options, you will simply be borrowing your own savings for a short period of time. Further, the interest you pay will be added to your account, which means you will, in the long run, incur zero interest cost on the loan.Further, you do not incur any tax liability despite withdrawing money from the fund provided you borrow money for a valid reason and comply with other rules related to change of jobs pending repayment of the amount withdrawn from the fund.
- Multiple investment options. 401(k) plans offer numerous investment options depending on the individual’s preferences and risk appetite. You can opt for super-safe mutual funds that invest only in bonds, bank deposits and guaranteed investment contracts. Or you can opt for a balance approach where money is invested in money market investments, stocks, and even in shares of your own company.You can balance the risk-reward component by analyzing related factors like you long-term needs, long-term career prospects, and additional avenues for savings. Of course, even an ultra-safe approach will be effective since you will be investing money over a very long period of time.Each type of investment offers varying degrees of risk and reward potential. For example, money market funds and stable value accounts have very low risk, since they’re often invested in certificates of deposit (CDs) or U.S. Treasury securities; however their earnings potential is much lower than other types of investments and they don’t always keep pace with inflation. Stocks and bonds have a higher risk for loss of value, but they also have the potential to earn much more, especially over long periods of time.
- Automated deductions. An employer-sponsored plan will entail automatic deductions of contributions from your monthly salary. You can plan your expenses without worrying about missing out on making contributions on time. You can continue making contributions even if you change jobs, which means your retirement planning will continue in an automated and disciplined manner at all times.This option is safe, reliable, and effective enough to guarantee a financially stable retired life. Hence, 401(k) is an investment option that no smart individual can afford to ignore.
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To learn more about your 401(k) options, contact Assured Retirement Group. We will advise you on the best methods for investing money for your retirement.