Tax Advantages You’ll Love More than Chocolate
This Valentine’s Day, we’re reiterating the tax advantages of a tax-qualified retirement plan, like a 401(k). These rewards are so sweet, you may just love them more than chocolate! In a tax-qualified retirement plan, 401(k)s are funded with “pre-tax” dollars meaning, the money is taken from the employee’s paycheck before taxes are deducted. This lowers the amount of taxable income and thereby reduces the amount of taxes the employee has to pay each year.
401(k) dollars are invested and any earnings on those investments are tax-deferred which means the employee doesn’t pay taxes on the earnings until they are withdrawn. This is good because the earnings in the 401(k) account make for a higher account balance and that balance will compound and grow at a faster rate than if the taxes were taken out immediately. Of course, Roth or after-tax deferrals are a sweet deal too, because you don’t pay taxes on the earnings in your account when you withdraw the money! This is especially great for those who think they will be in a lower tax bracket at retirement age.
For the employer, all contributions that are made to the 401(k) plan and profit sharing plan are tax deductible up to a certain percentage. This means not only the matching contributions the employer makes to the employees’ accounts but also any deferrals the employees make into the plan can reduce an employer’s taxes. Also, don’t forget that the cost to offer a 401(k) plan is tax deductible for employers too.
So go ahead, indulge yourself in the sweet savings of retirement and feel free to have some chocolate too!