How to maximize your contributions
The first of January is when most people start working on their new year’s resolutions, but we suggest you start early—and make saving more money one of your goals. You can get a head start with a 401(k) plan today, because if you set it up before the end of the year, you will start saving on taxes immediately. To get you motivated, here’s a look at the all the benefits of a 401(k) plan:
- Tax Savings: The money you contribute to your 401(k) is deducted from your pay before your income tax is calculated, which means you’ll pay less tax. Say you make $45,000 a year, and during the year contribute $4,800 into your 401(k) account. The result: Your taxes are assessed as if you made only $40,200 for the year. If you’re in the 25 percent tax bracket, that reduces your taxes by $1,200.
- Company Match: Many employers will match some or all of your 401(k) contribution, up to a maximum of 6 percent of your pretax income. A common arrangement has the employer putting in $0.50 for every dollar you contribute. If you’re not able to make the maximum allowable contribution, try to contribute at least enough to get the full amount of matching dollars from your employer.
- Faster Growth: Money invested inside a 401(k) has the potential to grow at a much faster rate than money saved in a regular savings account. The reason? You don’t pay taxes on your profits until you withdraw money from the plan. That means your plan can grow tax-free until you retire. In the meantime, that tax-deferred growth—known as compound growth—could supercharge your savings.
- Regular Savings Made Easy: Once you’ve signed up for regular 401(k) contributions, it’s easy to monitor your account activity. The automatic contributions help make it much easier to contribute.
- Customized Control of your investment selections: You typically can choose from a range of investments for your 401(k) contributions, including money market, index-based, and stock funds. You can customize how your money is allocated amongst the different investment options. Also, since your 401(k) deposits are not FDIC insured, it is important to be able to adjust your investments according to your risk tolerance and stage in life. And it’s usually easy to decrease or increase the size of your contributions as your situation changes.
What's next? The role of risk in investing
Any information presented about tax considerations affecting your financial transactions or arrangements is not intended as tax advice and cannot be relied on to avoid any tax penalties. Neither Merrill Edge™ nor its Financial Solutions Advisors provide tax, accounting or legal advice. You should review any planned financial transactions or arrangements that may have tax.
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