Tax day is readily approaching. I can see the sweat beading up on your brow right now.
I want to talk about how your 401k can save you money on your taxes next year. 401k plans reduce your taxable income because the contributions come out of your pay before taxes are withheld(pretax income). You also get tax-deferred growth – meaning you don’t pay taxes each year on capital gains, dividends, and other distributions within the 401k. Some companies offer an “employer match” system. This feature will not save you money on taxes but it is like getting free money every paycheck.
Here’s how it works:
Let’s say your company offers a “match” of 50% of the first 6% of an employee’s salary. Meanwhile, you earn $50,000 per year and contribute 6% of your salary annually to your 401k plan, just enough to get the match(6% of $50,000 is $3,000). In this case, your employer will match $1,500 of your contributions (half of $3,000 is $1,500). Even though you only contributed $3,000, your 401k account balance will show an increase of $4,500! FREE MONEY!
Contact your employer’s HR department to find out more about your 401k plan and how you can start contributing today. Remember if your company matches, it’s free money. Who on Earth would say no to that?
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