With the Thanksgiving holiday upon us many of us will be giving thanks for the ability to be with family, for the great meal they are able to enjoy, and perhaps for a few days off of work just to relax. Far fewer of us (I dare say nobody) will likely be giving thanks for their 401(k) plan. Here are four reasons that maybe you should:
Convenience makes saving for retirement easier. Since your contributions are deducted from your pay, don't underestimate the importance of convenience. With a retirement savings crises looming in the U.S., anything that makes saving easier is worth giving thanks for.
Roth 401(k)s allow for higher Roth contributions than Roth IRAs. If a Roth contribution is right for you and if your plan offers this option, the Roth 401(k) allows for higher contributions than a Roth IRA. You can defer up to 100 percent of your salary deferrals to the Roth option, while the limit on a Roth IRA is $5,000 ($6,000 if you are 50 or over). Any matching contributions from your employer must go into a traditional pre-tax 401(k). In addition, the ability to contribution to a Roth IRA has income limitations, contributions to a Roth 401(k) do not.
Your company match is free money. If your employer matches your contributions, all or in part, this is free money. A typical match is 50 percent on the first 6 percent of salary deferred. If you defer 6 percent the match brings your savings for the year to 9 percent. Put another way, this is a 50 percent return on your money, regardless of what the markets might do.
Fees and expenses must now be disclosed. Due to new legislation this year, plan sponsors must now make disclosures to participants regarding the fees associated with the plan investment choices and regarding plan expenses that are paid out of the participant's accounts. While the first round of disclosures might have had some hiccups and many participants likely ignored these disclosures, this is far more information than many investors who work with a commission or fee-based financial adviser generally receive.
I wouldn't expect anyone to mention their 401(k) as something they are thankful for around the dinner table on Thanksgiving (a tradition in our house over the years). However you should be thankful if you have access to this excellent retirement savings vehicle and you should be even more thankful if you plan offers a decent, low cost investment menu plus features such as a Roth option and/or a company match.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.
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