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401k 
Advantages of a 401k
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Tax deductions |
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Tax deferral | |||||||||||||||||||||
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Company matching | |||||||||||||||||||||
Investing in one's 401k plan is truly a gift — and indeed a "no-brainer". What is it about 401k plans that make them so attractive? Here are the most appealing features: |
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When a person invests in their company's 401k plan, the investment comes directly out of their paycheck. This means that the money will definitely be invested; there is no chance of this money going into your checking account and being forgotten or spent. An investment in your 401k reduces your taxable salary. For example, if you invest $10,000 in your 401k plan and your combined (federal and state) tax bracket is 33%, the first $3,300 of your investment is funded by the government. To further clarify, this means your net pay for the year isn't reduced by $10,000, but only by $6,700. |
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Once your money is invested, the income it earns is also tax deferred. So if those $10,000 you invested earn $1000 in the first year, all $11,000 are reinvested — the tax on these earnings isn't due until you take the money out of your 401k. In a regular savings account, by contrast, you would lose $333 to taxes in that first year and only $10,667 would go to work the following year. |
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In most instances, companies match a certain percentage of their employee's investment with their own contribution to that employee's account. This is done to encourage a higher participation in the plan. This is truly a gift from heaven. Not investing in a 401k plan where your employer matches a share of your contribution is analogous to knowing the result of a horse race before it is run but not betting on it. Most clients have told me that in participating in a 401k, even to the maximum amount permitted, their lifestyles are not affected. But such investments will certainly affect your lifestyle when you retire — in a very positive way. Those who invest the maximum allowed into a 401k plan during their working careers are very likely to meet their retirement goals from this source alone! |
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Suggestion: Go to How Much for Your 401k? or to W.E. Winners
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