401K Plan is provided by most employers. 401K plan is an ultimate guide for retirement. Compared with other saving plans that are available to private sector workers, the 401K plan has many good points. Listed below are the reasons for joining 401K plan.
- Employer automatically deducts the employee contributions from the paycheck every time the employee is paid. No reminder needed to write a check to save. The 401L enrollment form may allow the employee to make contributions as a specific dollar amount or as a percentage of the pay.
- If the employer matches the employee 401K contribution, it is basically free money from the employer. Most employers have offered some kind of matching contribution to encourage participation.
- Employee gets two tax breaks when the employee save in 401K plan. (1) Employee’s contribution to 401K plan is tax-deductible. The money the employee contributes does not count against the gross income for the year; thus, lowering the employee taxable income. (2) The money contributed to 401K plan grows tax-deferred. With 401K plan, the employee earning is rolled back into the plan and do not have to be listed as income on the tax return until it is withdraw.
- The 401K plan provides interest compounding. Over the long term, employee can see exponential growth from the plan.
- The 401K plan allows dollar-cost averaging strategy. Since a 401K saver makes a contribution with every paycheck, by default 401K plan uses this strategy.
- The 401K plan provides an inexpensive way to create a professionally managed diversified portfolio.
In conclusion. an employee should join the 401K plan if provided by the employer. The 401K plan is the best investment for retirement.