If your company offers a 401(k) retirement savings plan, don't hesitate to join. And don’t be surprised if your company automatically enrolls you. More and more employers are doing it in an effort to get American workers to save for retirement from their first day on the job.
Many firms match part of an employee's contributions, typically 50 cents on the dollar for the first 6 percent of pay, although these days some companies are contributing less due to the recession. Contribute at least enough to capture the full company match; otherwise, you're leaving free money on the table. If you join a traditional 401(k), pre-tax salary goes into the plan. If you're in the 25 percent tax bracket, that means your take home pay will drop by just $750 for each $1,000 you contribute to the plan. If your firm matches 50 percent, that means you'll have $1,500 in the plan for an out-of-pocket cost of just $750. Where else can you get a guaranteed 100 percent return on your investment?
If your company offers the Roth 401(k), you may be better off choosing this option. With the Roth 401 (k), after-tax money goes into the plan, so a $1,000 contribution really costs $1,000. The advantage? As with a Roth IRA, all withdrawals from the Roth 401(k) can be tax-free in retirement, while payouts from the traditional 401(k) are fully-taxable. You’ll benefit from decades of tax-free growth and tax-free withdrawals.
Depending on your income, contributions to a 401(k) might earn you a special tax credit as well. You can qualify for this credit on your 2014 return if your income is under $30,000 if you're single, or under $60,000 if you file jointly with your spouse. The retirement saver's credit is worth up to $1,000 for qualifying taxpayers (up to $2,000 if filing jointly) based on claiming a 10% to 50% credit on up to $2,000 that you put in a retirement plan. The credit, which reduces your tax bill dollar-for-dollar, is in addition to other tax savings that may apply to retirement plan contributions.