According to a 2021 Census Bureau survey, the most popular retirement accounts among working-age individuals between 15-64 years were 401(k)-style accounts, which held a 34.6% share. The second most common was Keogh or IRA accounts at 18%. Although the average 401(k) account balance dropped 20% in 2022 from a year earlier, 39% of participants increased their contributions (deferral rate) compared to just 9% who lowered their contributions. Why are they so popular? Because 401(k) benefits provide a truckload of perks. This article examines the top 401(k) benefits to make your retirement planning easier.
1. Compounding Interest of 401(k) Benefits
Your 401(K) savings will earn compound interest, a powerful tool for magnifying wealth. Compound interest can snowball your investment over time, lowering out-of-pocket contributions on retirement.
For instance, if you invest $1,200 yearly at age 25, with an initial investment of $1,000 at an annual return rate of 8%, you will receive $146,000 by age 55 from your $37,000 outlay.
2. Employer Matching Contributions
Though not a requirement, some employers make partial or full match contributions to employee’s 401(k) accounts, which adds to their retirement savings nesting egg.
Employers are more than happy to make matching contributions because they can deduct 401(k) benefits from income tax returns. The average employer match is between 3-5%.
3. Tax-Advantaged Savings
A 401(k) account will attract pre-tax and after-tax reliefs. You can lower your taxable income by deducting your 401(k) contributions, which apply only to traditional plans, not Roth 401(k)’s. The savings are also not subject to capital gains or dividends tax until you start withdrawing.
Since you pay tax on deposits in Roth plans (Roth deferrals) and voluntary contributions, withdrawals under these accounts are tax-free.
4. Higher Contribution Limits
401(k) typically have higher annual contribution limits than most IRAs, allowing you to save at a faster rate and retire earlier.
5. No Age Limit for Contributions
Beyond 2020, there’s no age limit for contributing to your 401(k) plan—as long as you are working.
The IRS will not force you to make mandatory withdrawals/distributions as long as you own less than 5% of your employer’s business.
6. Protection from Creditors
In case of bankruptcy or a lawsuit, creditors won’t access your 401(k) savings. However, the IRS can claim your savings over unpaid taxes, or your spouse can get a share of it when dividing assets during divorce.
7. No Penalty for Early Access
If you leave employment early, you can access your benefits after age 55 without a penalty. You would typically incur a 10% tax penalty if you withdraw before attaining 59½ years, but you can use the age 55 loophole to gain penalty-free access.
8. Acquire Loan
The 401(k) plan has a loan option that allows you to withdraw a lesser amount between 50% or $50,000 of your savings, with up to a five-year repayment period.
9. Late Saver Benefits
If you didn’t start saving for retirement early enough, the government allows you to make a $7,500 yearly catch-up contribution over the permissible $22,500 annual contribution.
You can also continue contributing to your 401(k) plan past the lawful 70½-age limit for making retirement contributions.
10. Fiduciary Protection
Since 401(k) plans fall under the ERISA Act, your employer is legally responsible for putting your best interests first.
The Act’s fiduciary standards state that the investment option they select for your 401(k) account should be stable and charge reasonable fees that the provider disclosed clearly.
401(k) style plans are the most popular among American workers—with good reason. Employees can gain plenty from 401(k) benefits, including compounding interest, fiduciary protection, savings tax advantages, and protection from creditors.