Why Every Employee Should Participate in a 401(k) Plan
401(k) plans are among the best retirement-building tools an employee can have. However, many people still do not participate, even if their employer offers the option of establishing a plan. Let's take a closer look at the reasons why eligible employees should enroll in a 401(k).
Employer Matching Contributions
One of the biggest benefits of a 401(k) is the employer match. This is basically free money that an employer gives when a worker contributes to their plan. This additional money could add up quickly over the course of an employee’s career.
Savers Credit for Participants
The savers credit encourages workers with low to moderate incomes to plan for retirement. The credit can decrease the amount of taxes owed by up to $1,000 per year just for participating in a retirement plan, although the actual amount of the credit will depend on both income and marital status.
Deferred Tax Payments
The money that goes into a 401(k) plan is taken from a participant’s paycheck before taxes are taken out. Doing so effectively lowers take-home pay, which in turn decreases the taxes paid. It’s important to note that while the money put into a 401(k) can accrue for years, withdrawals are taxed when they are taken out during retirement.
The federal government sets a maximum amount of pre-tax income that an employee can contribute to a 401(k). For 2013, this amount is $17,500, or $23,000 if the participant is over 50 years old.
Is it a good idea for employees to contribute the maximum amount possible? For most people, the answer is yes. When an employee puts a portion of each paycheck into a 401(k), the amount paid in taxes is reduced. The higher the tax bracket, the more money saved simply by not having to pay tax on it right away. Additionally, the extra money employees add every year works to earn them even more over time, thanks to the compounding effect. Once they hit that maximum amount, employees can start thinking about where to put the rest of their money if they have any left over.
Why Some Companies Don't Offer 401(k) Plans
While many of the larger companies offer 401(k) retirement plans for their workers, few small businesses do. The most common reasons why a small business may choose not to offer this benefit to its employees include:
- The owners do not want to spend time setting up a 401(k) program.
- Employers may think of it as an expense that they cannot afford.
- They may have a misconception that organizing and tracking retirement plans for workers is too complex and time consuming.
- Small business owners might assume that offering a 401(k) can increase other costs such as health care.
The reality is that setting up a retirement plan for a small business can be a fairly simple process. Perhaps the most important benefit to offering a 401(k) plan to employees is that it can act as an attractive retention tool.