Ask a goalgami Expert:Answer

Have a financial question?SUBMIT>



Question:


Do I have to participate in my company’s 401(k)? Is it mandatory?
-CrocDoc


Answer:


You don’t have to participate, but why wouldn’t you want to? Having a 401(k) is as close to getting free money as you’re ever likely to find. The income that you report on your federal and state tax forms is reduced by the amount of your contributions, potentially providing huge savings. Say you’re in the 25 percent federal bracket and 8 percent state bracket. If you contribute $1,000 to your 401(k), it will only cost you $670 after the tax deductions, and the investment gains and income that your contributions earn over the years will accumulate tax free, too. The money will eventually be taxed when you withdraw it in retirement, but chances are that your income will be lower then and will be taxed at lower rates.

Another advantage is that your employer probably will be making matching contributions. According to a recent study, companies on average make contributions equal to 4.1 percent of their employees’ salaries to their 401(k) plans, and employees have no immediate tax liability on them, either. If your employer makes dollar-for-dollar matching contributions, as is common, then, using the example above, your net contribution of $670 will give you $2,000 of assets. There could be circumstances in which participating in a 401(k) doesn’t make sense, say if you lived in a state with no income tax, you earned so little that you’re in the 10 percent or 15 percent federal bracket and you had debts carrying very high interest rates that you could pay down with the money that otherwise would go to the 401(k). Under almost every other imaginable scenario, though, contributing to the plan is advisable. But no, you don’t have to.

-Conrad de Aenlle



< BACK