Most of us know it is smart to save money for those big-ticket items we really want to buy - a new television or car or home. Yet you may not realize that probably the most expensive thing you will ever buy in your lifetime is your retirement. Perhaps you’ve never thought of “buying” your retirement.
Yet that is exactly what you do when you put money into a retirement nest egg. You are paying today for the cost of your retirement tomorrow.
The cost of those future years is getting more expensive for most Americans, for two reasons. First, we live longer after we retire - with many of us spending 15, 25, even 30 years in retirement - and we are more active. In short, paying for the retirement you truly desire is ultimately your responsibility. You must take charge. You are the architect of your financial future.
A 401(k) is a retirement savings plan sponsored by an employer. They allow workers to contribute a portion of their wages to a retirement account by payroll deduction. Generally, these deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral and they are not reflected as taxable income on your Form 1040, U.S. Individual Income Tax Return.
Although elective deferrals are not treated as current income for federal income tax purposes, they are included as wages subject to Social Security (FICA), Medicare, and federal unemployment taxes (FUTA). Refer to Publication 525, Taxable and Nontaxable Income, for more information about elective deferrals.
Some 401(k) plans may also permit you to designate some or all of your elective deferrals as Roth elective deferrals, which are generally subject to the same taxation rules as Roth IRAs.
There are several types of 401(k) plans available - traditional 401(k) plans, safe harbor 401(k) plans and SIMPLE 401(k) plans. Different rules apply to each. It is important that you become familiar with your plan so that you understand the special rules that apply to you. This information can be found in your plan’s Summary Plan Description (SPD).
Enrolling in a 401(k) plan is one of the best things you can do to save for your future. These plans offer the following benefits: