 Tax Deferred Savings
How do I need to use my 401(k) to the fullest once I begin participation?
There are really three very basic and equally important decisions when participating in a 401(k) plan. Your first decision will be “To what extent, or how much, do I contribute each pay period towards my retirement?” Typically, most financial planners recommend you save at least 10 percent of your income if possible. After you find out if your employer offers matching contributions, otherwise known as free money, you can make a more informed decision on how much you want to invest on your own. A typical employer offers 50 cents for every dollar you contribute up to 6 percent of your salary. If you can't afford to sock away 10 percent, contribute at least enough to get the full match. |
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Tax Deferred Savings (continued) Nevertheless, we believe that the decision you make, whatever the amount, has to imperatively be one that you are comfortable with. In other words, don’t overextend yourself by deferring so much that you can’t pay your own life’s expenses. Also, in making this choice, one needs to understand the power of saving through a 401(k) plan as opposed to conventional savings. The chart below helps to crystallize the net difference between a 401(k) and a taxed savings account: 401(k) SAVINGS vs. CONVENTIONAL SAVINGS
Let’s assume you make $13,000 per year and your goal is to save $600 over the course of a year. We can examine how to get to this goal by using two different methods – the 401(k) way and the “conventional” savings account way. |
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Tax Deferred Savings (continued)
As you can see, you would come out ahead by $90 a year in tax savings if you used the 401(k) savings method. That is, because the $600 you put aside in the 401(k) plan is BEFORE-TAX income, you benefit with a higher take-home pay. And this doesn’t even consider the “free-money” match the Employer provides. |
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