Why It’s Important for Employees to Sign Up for Their Company 401(k)

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Published by Ryan Cooley, Associate Wealth Advisor

By now you’ve probably heard over and over that you should be actively saving for retirement if you want any hope of having enough money to last throughout your golden years. This messaging is everywhere—TV commercials, Facebook ads, LinkedIn posts, and more. But do you know why contributing to retirement accounts is important? Aside from the obvious need for income down the line?

At Jacob William Advisory, we believe understanding the why behind your financial decisions is just as important as the decisions themselves. As such, here are three reasons why it’s important to sign up for your company 401(k) and how it may help you retire with confidence.

1.   Tax-Deferred Savings

One of the biggest benefits of contributing to a 401(k) plan is that you get to defer taxes on current income, typically until retirement. For many employees, especially those in higher tax brackets, being able to save for retirement with pre-tax dollars is a great advantage. Pre-tax retirement contributions reduce your taxable income, thereby reducing the amount of taxes you owe.

For example, if you’re in the 24% tax bracket making $150,000 per year, your tax liability is roughly $150,000 x 24% = $36,000. But, if you maximize your contribution to your 401(k) plan, your tax liability would be ($150,000 – $19,500) x 24% = $31,320. That’s a difference of $4,680 saved in a single year! Imagine how much money you can save in taxes over the course of your working years if you start contributing right away.

2.   Higher Contribution Limits

Employer-sponsored 401(k) plans have two types of contribution limits. First is the profit-sharing limit for employer contributions which is $61,000.[1] The next limit is the annual employee elective deferral limit, which is $20,500 for individuals under age 50, and $27,000 for those age 50 and older.[2]

The combined limit for both employer and employee contributions is still $61,000 (or $67,000 if older than 50), but because there are two types of contributions permitted, most employees will be able to contribute more and receive a larger tax break than if they used individual retirement accounts (IRAs) alone.

For instance, the annual contribution limit for both traditional and Roth IRAs is only $6,000 if under age 50, or $7,000 for those age 50 and older.[3] That’s more than 10 times smaller than the annual limit for 401(k)s for employees under age 50! Contributing to a 401(k) allows you to save more toward retirement and earn larger tax deferrals along the way.

3.   Compound Interest

Just as contributing early allows you to take advantage of massive tax savings over time, there is a compound effect that occurs with the money that is actually invested as well. That $19,500 contributed to your plan each year will grow exponentially over time, but the key part of that equation is time.

A single penny that doubles every day for a month may not seem to be that much on the surface, especially when compared to $1 million up front. But by the time the 30th day rolls around, you will have over $5 million in pennies. This same concept can be applied to your retirement account, but because retirement investments are at the mercy of the highs and lows of the stock market, it will take more than 30 days to see that kind of growth.

Conversely, if you wait to invest, you are missing out on growth year after year, and the resulting loss of earnings can be substantial.

 

Get Started Today

Don’t leave your retirement savings up to chance! Take the retirement readiness quiz to learn more about your savings options. If you’re interested in how we can help you make the most of your company 401(k), contact our office by calling 410-821-6724, emailing info@jacobwilliam.com, or scheduling an appointment at https://www.jacobwilliam.com/insights/#contact.

 

About Ryan

Ryan Cooley is an Associate Wealth Advisor at Jacob William Advisory, a wealth management firm whose sole mission is to serve their clients’ needs beyond their expectations. Ryan has a military background as a U.S. Army Infantryman, and he applies the values and character traits he learned through his experience to his role as a financial advisor. To this day, Ryan is passionate about veterans’ issues and holds a seat on the Advisory Board for Operation Second Chance and is a lifetime member of the Disabled American Veterans organization. Ryan obtained his bachelor’s degree in economics and his MBA from the University of Maryland. Outside of the office, Ryan enjoys spending time with his wife, Germaine, and their two wonderful children. He currently resides in Urbana, Maryland, and loves to fish, hunt, cook, watch Maryland Terrapin sports, and cheer his son and daughter on in all of their activities. To learn more about Ryan, connect with him on LinkedIn.

 

The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results.  Actual investment results may be more or less than those shown. This does not represent any specific product [and/or service].

This piece is not intended to provide specific legal, tax, or other professional advice.  For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

[1]https://www.investopedia.com/retirement/401k-contribution-limits/

[2]https://www.investopedia.com/retirement/401k-contribution-limits/

[3]https://www.forbes.com/sites/davidrae/2022/01/20/roth-ira-contribution-income-limits-for-2022/?sh=6a7e76497cbd

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