Even though nobody can deny the wisdom of saving for retirement, it is disconcerting to find that many employees still do not participate in the retirement plans sponsored by their employers. To a certain extent, this could be due to their not having sufficient income to be able to afford to make the necessary contributions. However, in many cases, participation does not take place simply because the employees do not adequately know the rules and benefits of these plans. A brief look at some of the most significant benefits of participation in an employee-sponsored retirement plan:
Reduction of Taxable Income
Apart from the satisfaction and reassurance that you are providing for your retirement years, one of the most significant benefits of participating in an employer-sponsored retirement plan is that the contributions made by you are usually on a tax-deferred basis. It means that the amount of your contribution is deducted from your income before it is taxed, resulting in lowering your tax burden. Of course, the tax will be levied when you receive the distribution from your plan at the time of retirement, however, even then you will end up paying less tax as you will have retired and hopefully in a lower tax bracket than at present. The maximum permissible amount of contribution by employees has been fixed by the IRS at $19,500 for 2020, which means that you will not be taxed on this amount.
Tax Deferral on Investment Income
When you make contributions to a tax-deferred retirement plan, you also get the benefit of having your earnings on the investments also tax-deferred, according to Inc.com. Because of this, you can exercise some control over when you pay tax, enabling you to do your tax planning more efficiently. For example, by making withdrawals in the years when you have less income, you can plan to pay less tax as you will be in a lower tax bracket. However, if you invest in an account that is not tax-deferred, you will need to pay tax in the year in which the earnings accrue. To ensure efficient tax planning, you should take into account your entire income from all sources in a particular year to decide if it is wise to make a withdrawal from your IRA account. Remember, if you make a 401(k) distribution before attaining the age of 59½, you will have to pay penalties, including tax at 10% on the amount distributed.
Avail of Free Money
If you are not contributing to a 401(k) plan that receives matching contributions from your employer, you are missing out on receiving free money. Since doing this is not sensible, you should consider contributing at least the maximum amount being matched by your employer. Not availing of this opportunity means that you are turning away good money that will come in handy at the time of your retirement.
As is seen, participating in an employee-sponsored plan has multiple benefits. If this facility is not offered by your employer consider contributing to an IRA instead. By contributing to a retirement plan, you can help to ensure a financially-secure future for yourself after retirement. Also, you can apply Gary Saitowitz Grant to gain finical relief.