10 Reasons to Invest In a 401(k)
As we all know, Social Security will not be enough for our retirement years. With increasing life expectancies and rising cost of living, planning for a secure and enjoyable retirement should start today. Many Americans have access to a workplace retirement plan such as 401(k), 403(b), and others, offering numerous benefits.
Benefits of Investing in a Retirement Plan
1. Build Retirement savings.
Since most Americans are behind in saving sufficient funds for retirement, investing in 401(k)s is the #1 reason to invest for retirement. The 401(k) is a great way for employees to pay themselves first before other expenses.
2. Tax-Deferred Growth.
Traditional and Roth 401(k) plans both offer significant tax savings in various ways. Both plan types offer tax-deferred growth, meaning that taxes are not due each year on the accumulation of investments within the account allowing for faster growth than other non-tax deferred investment accounts. Earnings are being earned on dollars that would otherwise be payable as taxes.
3. Tax-Deductible Contributions.
Contributions to traditional 401K plans are also pre-tax/tax-deductible providing tax deductions for contributions made. Tax-deductible contributions may allow for greater savings than after tax accounts.
Example: Assume a participant is in the 22% marginal income tax bracket. For every dollar contributed to a traditional 401K, there is a 22% tax deduction on the contribution. Another way to view it is the net cost to contribute $1 after the tax-deduction is only 88 cents on the dollar ($1 less 12% tax-deduction—12 cents = 88 cents).
For every $100 saved outside of a 401(k) plan, the net cost is $100 ($100 - 0 tax-deduction=$100). Saving the same $100 inside of a traditional 401(k) plan is $88 ($100 - $12 (100 x 12% tax-deduction) = $88.
4. Tax-Free Qualified Roth Distributions.
More plans today are offering Roth (after-tax) plans alongside the traditional (tax-deductible) plans. Roth IRA contributions are made with after-tax dollars and therefore not tax deductible. However, Qualified Distribution from Roth 401(k) plans will not be taxed if distributions are made after the account is established for 5 years and the participant is over age 59 1⁄2.
Think of it this way— Traditional 401(k) plans provide tax savings on the seed/dollar contributions, but the harvest/distributions from the plan are 100% taxable, and Roth 401(k) Plans provide no tax savings on the seed/dollar contributions, but the harvest/qualified distributions can be 100% tax free.
A person can participate in both plans provided they do not exceed the overall limit between the two plans. Both plans should be considered depending on your personal situation and tax planning objectives.
5. Retirement Savers Tax Credit.
Participants may also be able to take a tax credit for making contributions to their 401(k) plan based on their Adjusted Gross Income (AGI) and tax filing status. A tax credit is far more valuable than tax deductions as it is dollar for dollar offset for taxes owed. The credit can range from up to 50% of contributions up to a maximum credit of $1,000 ($2,000 if married filing jointly).
6. Higher Contribution Limits.
For 2025, the maximum annual contribution to 401(k) and 403(b) plans is $23,500. Those age 50-59 and 64 and over are allowed an additional catch-up contribution of $7,500. Beginning in 2025, A Super Catch-up limit of $11,250 is available for those 60-63.
Some who participate in a 401(k) plan may still be eligible for Traditional and Roth IRAs depending on their income levels and whether they or their spouse participates in a 401(k) or similar plan.
7. Systematic Investing.
Contributions are made through payroll deduction and provide an automated way to invest while providing the benefits of dollar-cost-averaging where contributions are made each month regardless of the market values. When markets are low, more shares of investments are purchased and when markets are high, less shares are purchased. This dollar-cost-averaging can be an effective way to accumulate wealth over time while avoiding costly emotional investing mistakes.
8. Diverse Investment Options.
401(K) offers a variety of investments ranging from conservative to aggressive risk levels. Many also offer target-date (retirement age) and target-risk (risk level) pre-allocated portfolios making investment selection easy.
Remember the Rule of 72 which states the time to double your money can be calculated by dividing the number 72 by the interest rate assumption. For example, someone earning 1% would need 72 years to double their money (72/1=72 years), where someone earning 8% would only need 9 years to double their money (72/8=9 years).
9. Creditor Protection.
Assets in 401(k) plans are protected against creditors by federal law. Many state laws also offer similar protection for IRAs.
10. Company Match.
Some companies offer a contribution match up to a certain percentage of what the employee contributes. Employees could be leaving money on the table by not contributing at least the amount of the full employer match. This should be the minimum starting point for contributions.
Bringing It All Together
As shown above, there are numerous benefits to participating in a retirement plan. The sooner one starts the more benefits that can be obtained from compounding. In addition, increasing employee contributions is particularly beneficial to long-term account growth. A great strategy is the 1% Challenge where employees start contributing where they can today and systematically increase contributions 1% over time, such as quarterly or annually.
Forward Thinking is Smart Planning.
About the Author
Tim Hudson, CFP®, APMA®, CEPA, CLU, ChFC, CRPS®, is a Certified Financial Planner® and Certified Exit Planning Advisor® and has over 25 years of experience specializing in advanced investment, retirement, business, and estate planning strategies designed to help high net worth individuals and business owners grow, preserve, and distribute wealth tax-efficiently.
Tim founded Wealthtrition.com to provide advanced wealth education, resources, and planning services for individuals and business owners.
You can reach Tim at (281) 477-3847 or tim@SilverStarWealth.com.
SilverStar Wealth Management, Inc.
17844 Mound Rd., Suite E, Cypress, TX 77433
(281) 477-3847 | www.SilverStarWealth.com
Important Disclosure
This material is intended for informational purposes only and is not intended to be a substitute for specific individualized tax or legal advice, as individual situations may vary. Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC (Kestra IS). Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS). SilverStar Wealth Management, Inc., Bluespring Wealth Partners, LLC, Kestra IS, and Kestra AS are affiliated through common ownership by Kestra Holdings.
Investor Disclosures: www.kestrafinancial.com/disclosures
You should consult with appropriate financial, tax, or legal professionals before implementing any considerations discussed.