When accepting a new job, the benefits become the bonus points on the pro-list to remind ourselves the change is worth it. But bragging about the great 401k and matching program an employer offers only holds weight if we’re actually planning on utilizing them.
We’ve been programmed to believe that 401k’s are one of the best and simplest ways to start planning for retirement. And while we aren’t denying that to be true, it’s difficult for us Millennials to explain why it’s so. So setting up a 401k seems daunting and overwhelming questions start arising …What do I invest in? Will the money actually grow? Is someone managing it? When can I touch it? What happens if I touch it earlier? And to whom do I ask all these questions?
It doesn’t help when we’re handed a thick packet we’re told “explains everything about the 401k benefits,” because most of us can’t translate the financial terminology to make any sense. Without understanding the system, we lack the motivation to take advantage of the opportunity.
If this sounds familiar, know that you are not alone. It takes some time and work to comprehend any retirement program, but knowing the benefits of them may just be the motivating fuel to get you moving and get you saving for retirement.
Here are the incentives that will make your 401k so irresistibly awesome you’ll follow through on your good intentions and take advantage of it.
You’re getting free money. Need I say more? The first thing you should do is find out how much the employer 401k match contribution is. Let’s say, as an example, that the company matches $50 for every $100 you deposit from your paycheck, and that you get paid twice a month. So you’ll figure out that you’re being handed an extra $1,200 per year! Now I think that’s a value worth the upfront work.
Less money to the government. When you contribute money to a traditional 401k the taxes on that money are deferred, meaning you don’t have to pay income taxes until you take the money out during retirement. This is great for a couple of reasons. First, the more money going into your account means more money that’s invested, and subsequently appreciating in value. Second, when you deduct the money from your paycheck there is a lower amount of taxes that come out of your paycheck. Most employers now offer Roth 401k options which is after tax. Just remember withdrawals from Roth 401k’s are not taxed but do have rules as to when you can take the money without penalties.
Set it and forget it. Usually contributing to your 401k is an automatic paycheck process, which means you set it up once and then don’t have to think about it again. And it’s fun to picture each month’s deductions, along with your employer’s 401k matching contributions, like a payment to a little worker elf that’s making sure you’re going to be taken care of when you’re older.
Withdrawals are subject to ordinary income tax and may be subject to a federal 10% penalty if taken prior to age 59.