 401(k) Benefits
What is a 401(k) Plan?
A 401(k) represents a way to reduce your taxable income since contributions come out of your pay
before taxes are withheld. Many plans include a matching contribution from your employer, and the
money you save benefits from tax-deferred growth. This allows your money to grow more quickly than
it would if it were taxed yearly.
Contributing part of your salary to a 401(k) gives you three principal benefits:
• You get an immediate tax break, because contributions come out of your paycheck before
taxes are withheld.• The possibility of a matching contribution from your employer -- most commonly 50 cents on the dollar for the first 6 percent you save. Bear in mind, not all plans offer a match. • You get tax-deferred growth as long as the money stays within the plan -- meaning you don't pay taxes each year on capital gains, dividends, and other distributions. |
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401(k) Benefits (continued)
What are the annual pre-tax 401(k) contribution limits?
Employee deferral limits (your contributions) rose to $13,000 in 2004, and will increase gradually
to $15,000 by 2006. Workers 50 and older will be allowed to contribute an additional "catch-up"
amount that increases by $1,000 annually from $3,000 in 2004 to $5,000 in 2006. Keep in mind;
however, while federal law sets the guidelines for what's permissible in 401(k) plans, your
employer may set tighter restrictions.
Why are matching contributions considered "free money?"
If you can't afford to maximize your 401(k) deferral, contribute at least enough to get the
matching contribution, or “free money.” The typical match is 50 cents on the dollar up to 6 percent
of your salary. This is money that you would not otherwise have access to from your employer, and
it boosts your 401(k) investment return before you even choose a mutual fund investment strategy.
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