For all of the drawbacks a 401k has as an investment, I still think people should invest in them for two reasons.

The first reason is that it’s free money being given to you by the company you work for.  And the free money can be substantial.

A typical 401k plan might be something like this.  If you contribute 5% of your earnings to the plan, the company will match taht and put another 5% in the plan for you.  That’s like getting a 5% raise.

Given that the average raise these days is around 2%, that is, if companies are awarding raises at all, that is two and a half years of raises that you can capture right now.

True, you have to cough up 5% yourself, but it’s worth it to get  matching money.  And in fact, it works out you probably aren’t really even reducing you pay by the full 5%.

Why?

Because of the second great feature of 401k plans.  And that is that there is no income tax taken out of your paycheck for your 5% contribution.  For example, if you are making $50,000 a year, your 5% contribution would be $2500.  But if you are in a 15% tax bracket, $375 of that $2500 is not taken out in taxes – because 401k’ contributions are tax deferred.

So your paychecks are really only reduced by a little over 4%.

So it makes a lot of sense to contribute to your 401k.

Because it’s free money.

And because it reduces your current payroll taxes.

And what’s not to like about that.

To your health and prosperity – John Roberts