TAX BREAKS

• The tax advantages of a 401(k) begin with the fact that employees make contributions on a pre-tax basis. That means you can deduct your contributions in the year you make them, which lowers your taxable income for the year.
• 401(k) earnings accrue on a tax-deferred basis. That means the dividends and capital gains that accumulate inside a 401(k) are also not subject to tax until you begin withdrawals.
• The tax treatment can be a significant benefit if you’ll be in a lower tax bracket in retirement—when you take money out—than you are when you make the contributions.

EMPLOYER MATCH

• Matching contributions are one of the top benefits of 401(k) plans for employees. Employers have the option to match a percentage of employee contributions up to a set portion of total salary, or contribute up to a certain dollar amount, regardless of employee salary.
• For example, a company may offer to match 50% of up to the first 6% you contribute to a 401(k). Let’s say you earn a $45,000 salary. If you contribute 6% of your annual earnings ($2,700) to your 401(k), your employer would contribute an additional 50% of that amount. That’s $1,350 of easy money.

HIGH CONTRIBUTION LIMITS

• You can save much more each year in a 401(k) than in an IRA. For 2022, the 401(k) contribution limits are $20,500 and $27,000 (includes a $6,500 catch-up for those age 50 and older), respectively.
• Your employer can contribute, too. For 2022, that combined limit goes up to $61,000, or $67,500 with the catch-up contribution.

CONTRIBUTIONS AFTER AGE 72

• You can continue to contribute to these for as long you’re still working. Even better, while you’re working, you’re spared from taking mandatory distributions from the plan provided you own less than 5% of the business that employs you.

SHELTER FROM CREDITORS

• 401(k)s offer excellent creditor protection. That’s because these plans are set up under the Employee Retirement Income Security Act (ERISA)—and ERISA accounts are generally protected from judgment creditors.