Greater Profits with Your 401K Contributions
Know your 401K contribution limits. It is the retirement planning part of your do it yourself financial plan. 401K contributions seem like a slow way to profit. It is misleading to think that you can make more money by investing outside of your 401K plan . If you are eligible to contribute to your 401K plan then your first investment dollars should be an option within that plan . Until you have contributed up to your 401K contributions limits, don't be tempted by short term gains elsewhere . Here are three reasons why:
1. Tax Savings.You contribute money into your plan with pre-tax dollars. That is a huge advantage in investing because more of every dollar you earn goes into your plan for your benefit. You make more profits faster because more of your money is working for you.
2. Tax Deferral. All the investment income- interest, dividends, and capital gain distributions are not taxed within your 401K plan. Without tax on the investment earnings your money will grow much faster . Money outside of your 401K that has investment income will be taxed on that income whether you take the distributions in cash or reinvest.
3. Automatic Increase in Contributions. If you are putting a percentage of your salary into your 401K plan, then as you make more money due to salary increases and bonuses, your 401K contributions to your plan increases. You have the potential to accumulate more profits when you contribute more . You have to save and then purchase an investment outside of a 401K plan. Remember that the longer the amount of time you have to grow your money, the faster the profits will be.
It is hard to find any investment that can build wealth as quickly as a tax deferred plan like the 401K when you look at the powerful advantages above . Of course, there will always be high risk, high reward investments around who will tempt you to invest. With the 401K plan, even if you choose poor performing investments, over time you will have done better than if you had those same investments outside of the 401K plan. By remembering the 3 reasons above, you will stick to contributing the maximum to your 401K plan and watch the money pile up. -Fern Alix LaRocca CFP® Wealth Coach