Ken Fisher Answers: Why Should I Invest in a 401k?

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Should you be invested in a 401(k)? A 401(k) has the potential to be an excellent retirement savings tool, but it is not appropriate for everyone. A 401(k) is an employer-sponsored retirement plan. It usually offers pre-selected investment funds that you can choose from—often picking a simple fund or set of investments and sticking with them is the best way to go. The value of your portfolio depends on how much you decide to contribute, how much your employer contributes (if they offer a match), and how the investments you select within the plan perform. One of 401(k) plans’ biggest benefits is their tax advantage. Traditional 401(k)s contributions are made pretax—meaning your contributions (up to the Internal Revenue Service annual limit) reduce your taxable income for the year. Additionally, the contributions and investment growth are tax-deferred, meaning your 401(k) money is not taxed until you make withdrawals.

If you are not currently in the workforce, or if you work for a company that does not offer a 401(k), you won’t be able to contribute to one of these plans. However, if you have the ability to invest in a 401(k), it can be a valuable tool for retirement savings. If you can select the appropriate investment option for your situation, you have the chance to get compounding growth that could help fund your retirement needs.

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