Fewer and fewer people are investing in their 401(k) plans, and are effectively jeopardizing their retirement due to a dangerous combination of little foresight and concerns about the current economy. 401(k) plans are seen as a luxury, and the only time anyone wants to sink their income into one is when the economy is rolling high and they are living out their champagne wishes and caviar dreams. Younger workers, suffering both from an overabundance of college loans and a large gap between their current age and retirement age, are especially vulnerable to this mindset. Working professionals, young and old, need to resist this urge to hold onto as much of that monthly paycheck as possible and, at the very least, start paying into their 401(k) plan. Beyond the obvious fact that you’ll need money to live after you retire, this very small sacrifice is well worth the bit of effort for three main reasons.
1. You don’t pay federal taxes on any income paid into a 401(k) until you start taking the money back out.
Did you make $40,000 this year? Did you earmark ten percent of your earning for your retirement like so many financial planners recommend? Well congratulations, you only have to pay federal taxes on (at most) $36,000 of your total earnings while that four grand sits nice and cozy in your retirement account. Now Uncle Sam will get his cut eventually, but in the present you’ll be paying less income tax and be preparing for the future. Plus you can bring whatever money you’ve paid into this account with you if you end up finding another job. Just find a new plan within 60 days, and that money will roll right on over.
2. 401(k) plans typically mean free money.
There is a wonderful little IRS rule that limits the maximum deferral of ‘highly-compensated’ employees based on the average deferral of the less lucratively paid employees. Because most corporate bigwigs want to take advantage of these retirement plans and save as much as they can, they’ll do everything in their power to make sure the average employee contributes to a 401(k) as well. Now sometimes this simply means they automatically enroll all employees into a 401(k) plan, but usually it also means that whatever company you’re working for will match your contributions up to a point; they typically cap at around 3% of your income, depending on how much you contribute. Put simply, they give you money to save money because the people running the company want to be able to save more. Check with your employer and see if they offer any perks with their 401(k) plan – it is something you’ll want to take advantage of early.
3. Most courts WILL protect your retirement accounts if you are forced into bankruptcy.
Bankruptcy laws are annoyingly complex, but most 401(k) accounts are legally protected from creditors seeking to recoup losses after a personal bankruptcy. So if you’ve been paying into a 401(k) for twenty or thirty years and life throws you a curveball, the money you’ve been diligently squirrelling away should be safe as long as you leave it alone. If you decided to take a bit of it out, try and pay down some loans, and then file for bankruptcy, the government could seize that bit and give it to your creditors. Really, the best thing to do is to consider the money in a 401(k) out of bounds until you reach retirement. That way your money is safe and protected until you leave the workforce.
Believe or not, the federal government wants you to have a secure retirement. After all if you’re able to live off of your own means, you are less likely to come looking for welfare. Because of that, they have done nearly everything in their power to make investing in a 401(k) enticing. Take advantage of this early on in your career! Yes, it is a little scary entrusting your money to the forces of the market and it does mean a little less money in your paycheck, but you’ll be a lot happier if you can retire comfortably than you would be with a couple extra hundred dollars at the end of the month.
Deborah Sweeney is the CEO of MyCorporation, an online filing services company that specializes in incorporations and LLCs. Find her online at mycorporation.com and on Twitter @deborahsweeney and @mycorporation.