A 401(k) plan may sound boring as hell, but it just takes a little imagination to realize this jumble of tax code is actually your best friend.
Warm, sandy beaches. No homework. A fruity drink in your hand.
Sounds like the perfect spring break, right? Well, what if – PLOT TWIST – this was your retirement?
It might seem unnecessary to talk about retirement as a 20-something, but the harsh reality is that a comfy retirement isn’t a guarantee anymore. With the U.S. economy still feeling the latent effects of the Great Recession, it’s now more important than ever to make sure you know how to properly save for your golden years.
While the first foray into adulthood will undoubtedly be plagued with issues like “Pizza or laundry?” you can still find little ways to put money away with the help of a 401(k).
LOL – What’s a 401(k)?
A 401(k) is a retirement savings plan sponsored by your employer that functions on a tax-deferred basis. The name may look like gibberish, but the letters and numbers stand for the area of the tax code it’s found in.
You decide what percentage of your paycheck you want to put in your 401(k) each billing cycle, and the amount is taken out automatically and put in a separate account. You can’t touch this account until you’re at least 59 ½ -years-old, which is a good thing because that means you can’t blow it all on IKEA furniture!
Why can’t I just put my money in savings and call it a day?
To put it simply: we know you won’t do it. With all those bills, bills, bills piling up, plus your affinity for take-out, your paycheck will be gone faster than you can say “AARP.” By taking the time to set up your 401(k) (and actually contribute to it) you won’t have to worry about separating the money yourself. Also, it’ll eliminate the possibility that you will dip into this savings on a rainy day because you can’t access it.
Show me the (tax-deductible) money
There are lots of benefits to using a 401(k) plan, but by far the most notable is that the money is taken out of your paycheck before taxes. This means that by putting some of your cashola away, you’re lowering the amount of taxable income.
So, in other words, putting away money in your 401(k) means you can pay a lower income tax when Uncle Sam comes asking for money in April.
Let me repeat that for those in the back: USING A 401(K) WILL LOWER YOUR TAXES.
This tax-deductible incentive will more than make up for the slightly smaller paycheck you’ll be receiving. In an example found on CNN Money, if you put $100 in your 401(k) each month, you’ll only really see about a $60-$80 decrease in your monthly pay.
And if you continue to increase your 401(k) contribution each year – even if it’s only by a measly one percent – you’ll be saving enough with taxes on the back end that the monthly payout difference will be negligible.
Let your boss foot the bill
If lowering your taxes isn’t incentive enough to start saving, get this: your employer can make matching contributions to your 401(k). This means that for each dollar you put in your 401(k), your employer will either match it fully or match a certain percentage of the dollar. Your boss is literally going to add to the down payment of your future beach house…what more could you ask for??
There is, however, typically a grace period you need to wait through before becoming eligible for matching contributions. Each employer is different; some could be one month and some could be one year. Either way, the big cheese is rewarding you for saving your cheddar.
Millennials may be notorious for being job-hoppers, but staying put can pay off in the long run (literally). Most employers increase their matching contributions the longer you stay with the company. But, if you do decide to move on to greener pastures, your 401(k) can be rolled over to your new employer, and you can continue to contribute like normal.
401(k)s: Not just for “old people”
The bottom line is that the sooner you start saving the better. With benefits like tax relief, employer contributions and rollovers, what excuse do you have?
While it might seem like a huge sacrifice to cut out a little extra cash each month, your money will only continue to grow from now until retirement. Cutting back on the splurging now means that you’re one step closer to being a badass grannie throwin’ back margs without a monetary care in the world.
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Header image: Getty