Why contribute to a 401k

For instance, if your employer offers a 5-percent match, it means they will contribute the same amount to your account that you do, up to 5 percent of your salary. You may be able to contribute more, but only the first 5 percent will be matched.

In other words, your employer is offering you extra money. Think of it as additional salary. Or a bonus. To withdraw the money means you also miss out on the advantage of time and its effect on compound interest.

Saving early and increasing your contributions as you go can help set yourself up for a secure retirement. This is a hypothetical example for illustrative purposes only. This does not take into account fees and taxes associated with investing nor the fluctuation of the investment market. This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer.

Tax benefits Automatic savings Employer matching contributions Tax benefits One of the most powerful advantages of participating in a k is the money you save in taxes. A new kind of retirement savings benefit. Learn More. Radically less expensive Employers pay a small one-time set up fee, and no ongoing plan administration fees. We do all the work It takes minutes to set up, no plan design required, no federal filing requirements. Investor focused Our portfolios are built with low-cost funds from leading asset managers.

However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money. The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

There's an easy answer and a hard answer to the question of how much to contribute to a k. First things first, the easy answer: Contribute at least enough to earn all of the matching dollars that your employer offers.

Whether that match is small or large, it amounts to free money. Our k calculator can help you see how much your contributions would add up to in retirement. Your pre-tax contributions are then tax-deferred until you choose to withdraw them in retirement. You can contribute as much or as little as you want to your account subject to plan and IRS limits. Plus, you have the flexibility to change your contribution levels at any time subject to plan limits dependent on your situation.

The earlier you start investing, the more time your money has to grow. One of the biggest advantages of investing in a k early is compound interest. Compound interest is when you earn interest on the principal amount of an investment plus any accumulated interest, i. Compounding can have a big impact on long-term investment and should be considered a powerful ally when it comes to saving for retirement. It may not seem like much looking at your k in the early days, but compounding can really add up.

Depending on your plan type, there are different ways to keep your retirement plan invested and growing on a tax-deferred basis.