401(k) Basics

Over 75% of employers offer a 401(k) plan to their employees. A 401(k) is a great retirement savings vehicle thanks to the tax benefits -- and thanks to the fact that most companies that offer a 401(k) also offer a match. If your company is one of these and you have access to 401(k) matching, here’s why you need to take advantage.

Today's Workers Are on Their Own for Retirement

Careers and job benefits look different today than they did 50 years ago. Workers rarely start at a single company and spend their entire career there. Companies helping their employees with retirement via pensions is becoming a thing of the past, too.

You may not be able to rely on the government in your golden years, either. Social Security benefits aren't likely to disappear entirely. But the system will have to change to keep serving the people who currently pay into it. Benefits won't look the same, and they may offer retirees of the future a lot less.

Your 401(k) Match Is Like Free Money on the Table

This is why it's so important to take advantage of a 401(k) if your employer offers one to you. Take responsibility for your own financial needs in retirement by contributing to yours. There are many advantages to doing so.

The biggest? Most employers incentivize employees to save by offering 401(k) matching. This means the company will match your contribution to the account, up to a certain percent. It's common to see companies offering up to a 3% to 6% match.

That means if you contribute 3% of your pay to your 401(k), your employer will match it. It's like free money, or giving yourself a raise that you use for your retirement savings.

The Tax Benefits of 401(k) Savings

Getting that additional money from your employer via a 401(k) match is one of the best benefits of contributing to your account. But there are some tax advantages you can enjoy, too.

Contributions that you make to your 401(k) account are made pre-tax. That means you don't have to pay income tax on the money you put into this retirement savings vehicle. This can reduce your tax burden, leaving you with more money in your pocket to save.

The Sooner the Start, the Brighter Your Financial Future

Compound interest can help you grow your wealth even more. Let's say you open a 401(k) account and save $5,000 in the first year. Then you continue to save $5,000 to the account annually for 20 years.

Without compound interest, you'd have $100,000 saved at the end of 20 years. Not a small sum by any means. But thanks to the compound interest on your 401(k) investments, assuming a conservative 6% return, you'll actually have nearly double that amount: $199,965.10!

The longer you give your nest egg to compound and earn returns, the bigger it will be. That means when it comes to saving and investing, the best time to start is yesterday. The second best time? Today!