Economic and Investment Principles in Business
This is the first in an ongoing series about simplifying economic and investment principles for your everyday business needs.
One of the best ways to increase employee morale and attract high quality candidates to your company is by offering an employee benefit package. Though employee benefits vary from business to business, most packages include some combination of medical insurance (health, dental and vision) and a retirement plan. The most commonly used retirement plan is a 401(k) plan.
But what exactly is a 401(k) plan?
The phrase”401(k)” refers to the section of the IRS code from whence it originated. First available in 1981, a 401(k) plan typically offers an assortment of mutual fund investments that employees can use to earmark a portion of their income toward retirement.
It is a common misconception that a 401(k) plan is an investment itself. It is not. The 401(k) is the piggy bank you put your hard-earned money into. To use another analogy, the 401(k) is the aquarium, not the fish. It facilitates your ability to save on a regular basis.
There are many benefits to investing in a 401(k). First, the savings are done a pre-tax basis. This means that for tax purposes, you are reducing your adjustable gross income (AGI) by the amount of your contributions. This will allow you to reduce your tax liability year in and year out.
Second, many employers make a matching contribution up to a certain percentage. This is a powerful benefit as essentially your employer is adding “free money” to your retirement portfolio. After a certain number of years with a company, you are “vested” and the money is yours to keep should you change jobs.
Third, your retirement savings will grow tax deferred until you begin withdrawing your savings during retirement. For those of you who are in your 20s or 30s, your investments will grow for several years without triggering any tax consequences.
Lastly, one of the main benefits of a 401k is choice. The plans offered by many companies include conservative mutual fund choices (money markets and bond funds), moderate (blue-chip income stock funds) and more aggressive choices (small cap and international funds).
Do yourself and your future a favor in 2008. Take the time to speak with your Human Resources contact and learn about the power of your tax-deferred investment savings.
[tags]employee_benefits, employee_benefit_package, free_money, gross_income, investment_principles, irs_code, medical_insurance, mutual_fund_investments, retirement_plan, tax_liability, tax_purposes[/tags]
