Why is 401K a good option?
After chatting with some of my teammates, they were shocked when I told them I don’t put money in 401k and haven’t opened an account. I have been working for 2 years now after college. They explained me the importance of it but I just can’t seem to see the full benefit. I am 25 and immigrant so I didn’t know this concept of 401k until last year. I just don’t see the point of putting money into it when I don’t wanna work until I’m 60 to be able to take it out without penalties. So what’s the point then? Can someone with a senior age please give me the valid reason to open a 401k? I’ve been watching YouTube videos to understand more but I hit a wall with the fact that you pay penalties if you take the money out early. TC: 100k
Tax shield is another big advantage. If you invest in a normal brokerage account, you get taxed twice
That tax shield when compounded (which it does) is significant
Amazon, can you explain what you mean by this? One other consideration for OP: you’re young, and if you anticipate increasing your TC later on, you should take advantage of Roth 401k now if it’s available and your employer matches contributions.
Look up FIRE - there’s ways to use it way before 59
You pay less in taxes now and the money grows tax free. 401k doesn't have to be your only investment account. I don't plan to work until my 60s either, but I do intend to be alive then.
The benefit is that your company will usually match it and put some in and it lowers your taxable income since what you find it with it is not taxed. If you plan on being alive at 60 then it’s a no brainer since a regular taxable investment account you fund is with taxable income. There are ways of taking dispersements out of it before 60 too. If you plan on retiring before 60 then it’s just part of the strategy
It’s very simple. Do you expect to live past 60? If so, it is a way to minimize taxes. My plan is to contribute the absolute maximum to my 401K for 5-10 years and then completely stop and let time value of money / compound returns do it’s thing. The rest of my life, I will spend my money aiming to almost exhaust it all by age 65ish. Then switch to the 401K at that age. Do not use it as a way to grow your net worth or to save for big life expenses. But if you have a long life expectancy for yourself, it’s a no-brainer. Besides, it’s a safety net - It’s money you don’t really think about that exits your paycheck before you even receive it.
I’m sorry, but you should have known this. Please put your December check in 401k and use pretax money. If there will ever be a year in the future in which you’re not working then you can get a significant portion of the 401k out without paying much taxes.
Yes that’s my fault for not knowing, I never cared to learn about it because I had the mentality I wanted all the money in my bank account and not in an account where you can’t just take it out whenever. I will open 401k today, all these comments have helped me understand why it’s good. Thank you!
If your employer matches it, you are leaving that free money. Typical match is 50% of your contribution, also given 401k’s tax benefit you can view it as a 60%-80% return over your contribution. And you can use that money to invest ETFs. Basically if you think you can out perform the 60% return annually, then don’t contribute; if not, that’s a better option. Penalty is 10% if withdrawn early, together with a tax of the same rate you’re paying in the year of withdrawn.
It’s a no brainer. However, you only put in money that you won’t need in near future. Tax benefits, free money through employer matching contributions, compound interest are the advantages. Just look at some simulations on Fidelity for your projected retirement income and you might feel better about it.
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Employer match is money you’re leaving on the table. Even if you move back to india, there are ways to withdraw it with minimal penalty amount only.
Hmmm.. How do you know he or she is from India?
That was an example I guess