A 401K Plan Can Be A Worthwhile Experience

By Kim Bubet

Filing ones taxes is a ritual, which we all must comply. While it can be a stressful event, with the proper planning, it can be rewarding too. Did you know that 401K and IRA contributions could significantly, reduce your tax burden?

A 401K plan is an employer offered, retirement investment plan. If you happen to work for an employer who offers a 401K plan as an employee benefit, it’s a good idea to get enrolled as soon as possible.

Here are some benefits to participating in a 401K plan:

1. Contributions to the plan are typically made on a before tax basis. This can be an immediate tax saving. The 401K-contribution limit in 2013 is $17,500, which is an increase of $500 over last year. If you contribute the maximum, make sure to make the necessary changes to your plan. There are catch up provisions, which allow additional contributions of up to $5,500, if you are over 50 years of age.
2. Your annual contributions will reduce your federal taxable income by the total amount of those contributions. For example, if your gross taxable annual income for 2013 is $100,000, and you contribute $10,000 to your 401K plan during 2013, your net taxable income will then become $90,000.
3. Another significant advantage to participating in a 401K plan is the employer match. These matching contributions vary from employer to employer, but current matching contributions seem to vary anywhere from 50% to 100% of the first 6% of one’s salary. For those who do not contribute, they are missing out on free money.

Vesting does not affect employee contributions, or the monies you contribute, and should not affect your decision to participant in your employers plan. This is a great way to start saving. Before you know it, you will be surprised at the balance of your plan.

If your employer does not offer a 401K plan, don’t sweat it, you can open an IRA and your contributions can receive some of the same tax advantages as a 401K. Now you’ll just have to decide between a Traditional IRA and a Roth IRA.

Kim Bubet, a New Jersey native now living in Virginia, holds an MBA in finance from Fordham University. He has over 12 years of financial services experience in the large market 401K arenas, cash management and retail investment management.

READ MORE: More on Taxing Situations.