Celebrated each year on the Friday after Labor Day — a timing choice meant to highlight the worker-focused nature of the observance — National 401(k) Day lands on September 6 in 2024. And as with each year it’s celebrated, the observance marks a great time for American workers to consider their retirement goals and ensure that they’re taking the proper steps toward funding their future retirement.
6 facts about the 401(k)
Of course, the observance is named for the 401(k) retirement savings plan, a popular route among Americans for setting aside savings for their retirement. A big part of the plan’s appeal is that it enables workers to leverage tax advantages on the money they save for retirement, in addition to often including employer matches of a percentage of the money workers put into their 401(k) savings accounts.
To celebrate this year’s National 401(k) Day, consider these six 401(k) facts that can help you better understand the plans that offer a great place to stash your retirement savings:
- The 401(k) is an employer-provided retirement savings plan. For those wondering how to start a 401(k), it all starts with your employer. The 401(k) is a company-sponsored account that allows employees to contribute a chosen share of their earnings each paycheck to their retirement savings. To make the plan even more appealing, employers often match a specified percentage of the money that workers put in.
- The government-allowed 401(k) contribution limit is much higher than that of an IRA. Besides 401(k)s only being offered through employers — while individual retirement accounts (IRAs) can be set up by consumers through a brokerage or a bank — another big difference between a 401(k) and an IRA is seen in their contribution limits. Tax rules allow for substantially higher annual 401(k) contribution amounts than IRA contribution amounts. In 2024, for example, consumers can contribute up to $23,000 in their 401(k)s, while the IRA contribution limit is set at $7,000.
- Saving for retirement with a 401(k) is a long-term investment strategy. Most 401(k) plans allow participants to put their set-aside savings into a range of investment options, typically mutual funds such as index funds, large- and small-cap funds, foreign funds, real estate funds, and bond funds. The mix of fund options available will usually range from conservative, income-oriented funds to aggressive, growth-focused funds. When choosing between them, the investor should consider things like his or her anticipated time to retirement, personal investment objectives and risk tolerance — then make a plan and stick to it, giving the investments time to grow over the long-term.
- Making 401(k) contributions could qualify you for a tax credit. Among the top tax benefits of a 401(k) is that money is put into the retirement account on a pre-tax basis, lowering the account holder’s taxable income for the year of the contribution. A 401(k)’s earnings also accrue on a tax-deferred basis, meaning that any dividends or capital gains the account’s investments produce are not subject to taxes until the funds are withdrawn. But another, less-well-known 401(k) tax benefit called the Retirement Savings Contribution Credit (aka the Saver’s Credit) can additionally allow account holders below certain income thresholds to claim a tax credit that reduces their taxable income by a percentage of their 401(k) contributions — up to $1,000 for single filers making no more than $38,250 in 2024, or up to $2,000 for those who are married filing jointly and make no more than $76,500 for those who are married filing jointly.
- It’s important to investigate the fees you’re paying on your 401(k). Nearly all 401(k) plans involve fees and charges — which can vary greatly and can sometimes be somewhat hidden (or at least a challenge for account holders to nail down/evaluate). These 401(k) plan fees typically range from .5% to 2%, with the variations commonly linked to factors such as the provider, the size of the plan and the number of plan participants. They’re ordinarily related to administrative and/or management costs, and they can be charged by the plan provider and/or the various funds within the plan. To ensure that your 401(k) plan fees aren’t causing an outsized impact on your net investment earnings, it’s important to review your plan materials and statements from time to time to gain a better understanding of what you’re being charged. While you can’t do much to avoid the fees charged by your 401(k) plan provider, you can opt for funds with lower fees to reduce the overall impacts on your earnings.
- A Roth 401(k) could be worth considering. While the 401(k) allows you to contribute to your retirement savings without having to pay taxes up front, you will be taxed on the funds when you make withdrawals from the savings account (typically after retirement). But with a Roth 401(k), you make after-tax contributions to your retirement fund — enabling you to access tax-free funds in retirement. If a Roth 401(k) option is available to you, it may be worth looking into, especially if you’re a young investor with a lower income, an eye toward long-term growth and a reduced need for an immediate tax break.
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