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by John Bearss
Do you need to know what is the 2013 max 401k contribution limit? We have this answer and so much more regarding 401k contributions. Read on to discover 6 benefits of participating in a 401k plan at work.
Here are the Facts from the IRS
- The 2013 max 401k contribution limit is $17,500 (up from $17,000 in 2012)
- If you are age 50 and over, you can contribute a catch-up amount of $5,500, making your total max contribution limit $23,000
- Contributions to a 401k plan are excluded from your taxable income in the current year, in other words, contributions are pre-tax
- If you contribute to a Roth 401k, contributions are included in your taxable income (after-tax)
6 Benefits of Participating in Your Employer’s 401k Plan
Unless you absolutely cannot afford to set aside any dollars whatsoever, you should contribute to your employer’s 401(k) plan. A 401(k) plan is one of the most powerful tools you can use to save for your retirement.
1. Immediate Tax Savings. The first benefit is that your contributions to a 401(k) plan are not taxed as current income. They come right off the top of your salary before taxes are withheld. This reduces your taxable income, allowing you to pay less in taxes each year. You’ll eventually pay taxes on amounts contributed when you withdraw money from the plan, but you may be in a lower tax bracket by then. You may even qualify for a partial tax credit for amounts contributed.
2. Tax-Deferred Growth. Furthermore, money held in a 401(k) plan grows tax deferred. The investment earnings on plan assets are not taxed as long as they remain inside the plan. Only when you withdraw those earnings will you pay taxes on them (again, possibly at a lower rate). In the meantime, tax-deferred growth gives you the opportunity to build a substantial 401(k) balance over the long term, depending on investment performance.
3. Free Money (a.k.a. Employer Matching). If you’re lucky, your employer will match your contributions up to a certain level. You typically become vested in your employer’s contributions and related earnings through years of service, the details depend on the plan. Employer contributions are also pretax and are basically free money once you’re vested, so you should try to take full advantage of them. If you fail to make contributions and receive no match, you are actually walking away from free money your employer is offering to you.
4. Access to Low-Interest Borrowing. Another beneficial feature that many 401(k) plans offer is the ability to borrow against your vested balance at a reasonable interest rate. You can use a plan loan to pay off high-interest debts or meet other large expenses, like the purchase of a car. You typically won’t be taxed or penalized on amounts you borrow as long as the loan is repaid within five years. Immediate repayment may be required, however, if you leave your employer. Loan payments are deducted from your paycheck with after-tax dollars.
5. Convenience and Reliability. 401(k)s are a very convenient and reliable way to save. You decide what percentage of your salary to contribute, up to allowable limits. Your contributions are deducted automatically from your salary each pay period. Because the money never passes through your hands, there’s no temptation to spend it or skip a contribution here and there. Most plans allow for contributions as small as 1 percent of your paycheck.
6. Many Employers have a ROTH Option. I have noticed many employers now offer you the ability to make after-tax “Roth” contributions to your 401(k) plan. Because your Roth contributions are after tax, those contributions are always tax free when paid out to you. But the main attraction of Roth 401(k) contributions is that the earnings on your contributions are also tax free if your distribution is “qualified.” In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 401(k) contribution, and you are either 59½ or disabled when you receive the payment. So check with your plan administrator to see if you have the ability to contribute to a Roth 401(k).
Until next week!
Disclaimer: Investing involves risk. Always do your own due diligence and consult a trusted financial professional before making any investing or financial decisions. John Bearss is a registered representative of and offers securities through SICOR Securities, Inc., Member FINRA, MSRB, SIPC, 6500 Poe Avenue, Suite 105, Dayton, OH 45414 | (937) 890.3101. Neither SICOR Securities, Inc., Lifetime Decisions Management nor their representatives provide legal or tax advice. Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. and SICOR Securities, Inc. are not affiliated.