As an investor, you have many different accounts that you can use to invest your money in. And each of these different accounts has its own advantages and disadvantages. But there is one account that stands head and shoulders above the rest. It is your 401(k) plan.
What makes your 401(k) plan the best place to invest your money for the long term? In this post I will show you all of the reasons why this type of investment account has the greatest impact on the growth of your money.
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What Is A 401(k) Plan?
Of course, we first need to make sure that we are all on the same page as to what a 401(k) plan is. It is a defined contribution plan that allows workers to save for their retirement. In order to invest in a 401(k) plan, you need to work for a company that offers this investment vehicle or you have to be self-employed and open one yourself.
A 401(k) plan typically works by having you instruct your employer to withhold a percent of your pay from your paycheck and invest it into your plan. In many cases, your employer will also match a portion of your contribution as well.
A typical match might be 50% on the first 3% you contribute. So if you save $100 per paycheck in your 401(k) plan, your employer will match this and put in $50.
The Many Benefits Of A 401(k) Plan
Now we get to the good stuff. Why exactly does a 401(k) plan outshine all other types of investment accounts? Here is the list of reasons why.
#1. Shield Money From Taxes. When you contribute to your 401(k) plan, the money you invest is taken out pre-tax. This means when you do get taxed, you are taxed on less income than you otherwise would be.
For example, if you make $50,000 and are in the 25% tax bracket, you are paying $12,500 a year in federal taxes. But if you contribute $18,000 to your 401(k) plan, you taxable income is now $32,000 and you are in the 20% tax bracket. You end up paying $6,400 in federal taxes, saving yourself close to $6,000 in taxes.
