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given time. If you leave the company before you are fully vested, you will lose some of the money in your plan.
2. Federal (and sometimes state) taxes on the money you deposit are deferred until you draw the money out (typically at retirement) so less is taken out of your paycheck for taxes. Your contributions will be deducted from your paycheck before taxes are withheld. Depending on your tax bracket, this pretax deduction can be like getting a 25% rate of return on your investment. You’ll eventually have to pay taxes on the money but you should be in a lower tax bracket when that time comes. These contributions are then invested into the funds you select. Most plans offer stock, bond, and money-market funds.
Five Reasons to Start a 401(k)
Financial writers Jenny and Patrick McKinney offer the following 5 reasons for opening a 401K plan if it is offered by your employer:
1 . Saving and investing are easy: Your contributions are automati- cally deducted from your paycheck so you save regularly and don’t miss the money.
Your money is invested in funds that you choose or your employer might make the investment choices for you. The options for invest- ment are prescreened so that investment risk is reduced to a certain degree.
2 . Contributions are made before taxes are taken out: You aren’t responsible for income tax on your contributions until the money is withdrawn.
3. Earnings from a 401K plan aren’t taxed right away: You aren’t responsible for income tax on your investment earnings until the money is withdrawn. This means you will probably be in a lower tax bracket when you are eligible to withdraw from your plan resulting in more savings on taxes.
Where Should I Save My Money?