A 401k offers a greater financial future than Social Security or most pension plans. It is now more important than ever that employees invest in this financial lifeline.

Outside Retirement Resources

Both Social Security and pension plans are considered non-retirement resources, that is, the retirement resources come from a place unrelated to the worker. It’s no secret that outside retirement resources have caused numerous financial disasters in recent years.

Social Security is no longer a viable retirement option because it doesn’t accumulate wealth like a 401k does. In addition, Social Security has suffered serious funding blows in recent years. Not only does it not guarantee hard workers a secure retirement, it also does not guarantee them any retirement at all.

The same goes for pension plans. There have been cases where these plans were not paid due to money problems with the payer. Other pension plans are depreciated through corporate acquisitions. It seems like hard workers don’t have options, but that’s only true if those hard workers are dependent on outside resources. When an employee sets up a 401k, no one can touch that money except the employee.

The basics

There are two types of plans: traditional and Roth. Both can be converted to an Individual Retirement Account (IRA) at retirement or if an employee leaves the company, regardless of the reason.

If you participate in a traditional plan, then an employer-sponsored plan allows an employee to save for retirement with a reduced tax burden, which means the employee enjoys tax-deferred earnings. This starts the moment an employee deposits money into his account. The IRS allows this deferral because the money deposited into the account comes from a paycheck before taxes are taken out. The result: less taxable income and a lower tax bill. Taxes are never paid on the account, nor are any investment earnings it generates until the money is withdrawn. Most people withdraw this money at retirement when they have lower income and tax rates. These low later life numbers mean less money is paid in savings.

If you participate in a Roth, the deferral does not reduce taxable income or the tax bill. The reward comes last when the money is withdrawn tax-free as long as the employee is at least 59 1/2 and the account is at least five years old.

Another advantage is that it is common for an employer to match a portion of an employee’s savings after a certain percentage has been saved. This occurs in both traditional and Roth plans. Sometimes this coincidence can equate to a fifty percent return, virtually unprecedented in investment returns.

Available Investments

It is common for plans to offer eight to twelve investment options. Some of those options include company stocks, money market funds, stable value accounts, and stock mutual funds. A financial adviser can offer great insight into what type of investments to make based on individual needs.

In the end, it’s about a strong financial future for retirement, as well as all the things you’d like to do in your later years. A 401k can create a great foundation.