Approximately half (51%) of Americans are not actively contributing to a 401(k) plan, according to a survey conducted by Edward Jones.
If you have access to a 401(k), it’s wise to make the most of it. The 401(k) is an incredibly powerful investing tool, and it can help you save far more than you would with other types of retirement accounts. While some advantages such as employer matching contributions are well known, there are a few other perks you may not know about that can give your savings a boost.
1. High annual contribution rates
With any type of retirement account, there are limits to how much you can contribute each year. Those caps change each year, but for 2021, you’re allowed to save up to $19,500 per year in your 401(k). In addition, if you’re 50 or older, you can contribute an extra $6,500 per year, for a total of $26,000 per year.
In contrast, IRAs have annual contribution limits of just $6,000 per year, plus an additional $1,000 per year for those 50 or older. An IRA alone may not be enough if you’re a super saver, and investing in a 401(k) can help you save significantly more.
2. The saver’s credit
The saver’s credit is a tax deduction for investing in your retirement account. Depending on your income, you could earn a tax credit of up to 50% of your annual retirement account contributions.
You’re eligible for the credit in 2020 if you’re earning less than $32,500 per year (for individuals), $48,750 per year (for heads of household), or $65,000 per year (for married couples filing jointly). Generally, the lower your income, the larger your tax credit will be. However, the maximum tax credit you can receive is $1,000, or $2,000 for married couples filing jointly. While that may not seem like much, if you’re earning the full credit each year, that money adds up over time.
3. Automatic enrollment
One 401(k) perk that’s easy to overlook is automatic enrollment when you start a new job. Workers who are automatically enrolled in their 401(k)s tend to save more, according to a report from Fidelity Investments. Among those who were automatically enrolled in their plans, the savings rate jumped from 4% to 6.7% over 10 years, the report found.
In addition, automatic enrollment encourages people to stay in their plans, according to Fidelity. When workers are auto-enrolled in their 401(k)s, 87% of them continue to participate. By comparison, plans that don’t auto-enroll employees have a participation rate of just 52%.
In other words, automatic enrollment makes it effortless to start and continue saving, especially when contributing to your retirement fund may not be at the top of your mind when you start a new job. When you don’t have to think about saving, it’s often much easier to stick with it.
Maximizing your 401(k)’s potential
Investing in your 401(k) is one of the best ways to save for retirement, and there are several advantages to contributing to this type of account. By making the most of these 401(k) perks, your savings can reach their full potential.