Ramit Sethi Breaks Down 3 Benefits to Having a 401(k)
Written by
Cynthia Measom
Edited by
Ashleigh Ray
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
401(k) accounts are popular. According to the United States Census Bureau, among working-age individuals — ages 15 to 64 — 401(k)-style accounts were the most common type of retirement accounts in 2020.
They were used by 34.6% of workers, followed by 18.2% using IRA (or Keogh) accounts and 13.5% using defined benefit or cash balance plans.
If you’re wondering if the 401(k) offered by your employer is helping you do the most with your money, it can help to educate yourself on the benefits of this retirement savings vehicle.
Ramit Sethi is a financial influencer, author, blogger and podcast host who posts his financial advice on LinkedIn among other places. Here is his take on three benefits to having a 401(k), according to one of his recent LinkedIn posts.
Pretax Money Means an Acceleration of 25%
Sethi said that retirement accounts offer you a deal. “You promise to invest your money for the long term, and in exchange, they give you huge tax advantages,” he said.
Sethi wrote that the money you contribute to a 401(k) is pre-tax money — it isn’t taxed until you withdraw it many years down the road. He said that means you have much more to invest for compound growth, to the tune of 25%-40% more.
“Sure you’ll pay taxes when you withdraw your money later,” wrote Sethi, “but that extra 25% turns out to make a huge difference as it gets compounded more and more.”
An Employer Match Equals Free Money
Free money — who would walk away from that? That’s exactly what you’ll get if your employer offers what is called an employer match.
Sethi wrote that, in many instances, your employer will actually match — dollar for dollar — part of your 401(k) contribution, which means that you automatically score additional free money for investing.
Sethi explained in his LinkedIn post how matching works: “How does matching work? Here’s an example: Let’s say your company offers a 1:1 match up to 5%. This means your company will match every dollar you invest up to 5% of your salary.
“If you make $60,000/year and you contribute $3,000 (5% of your salary), your employer then matches the $3,000. Your actual investment turns out to be $6,000/year with the match.
Sethi also said that a 5% match can actually double your returns.
You Can Rely On Automatic investing
Another benefit to having a 401(k), according to Sethi, is that you can rely on automatically investing the money. This is helpful because you don’t have to remember to do it every month. Also, it can lessen the blow of having the money taken out of your paycheck.
“With a 401(k),” Sethi wrote, “your money is sent into your investment account without having to do anything. You won’t see the money in your paycheck because it is automatically taken out and transferred (you will learn to live without that money).”
2 Other Benefits To Having a 401(k)
The benefits Sethi broke down aren’t the only ones that apply to having a 401(k). Here are a couple of more to consider.
Financial Safety
By law, 401(k) plans are governed by the Employee Retirement Income Security Act — also known as ERISA. This means that your employer has a fiduciary responsibility to create your 401(k) based on your best interests.
It also means your plan administrator has to make sure that you have access to stable funds with fees that are reasonable. You must be kept informed about administrative expenses and the way your funds are performing so that you can make informed decisions regarding your investments.
Possibility for Loans or Hardship Withdrawals
Depending on your 401(k) plan’s rules, you may be able to withdraw money from it for certain financial hardships, such as for expenses involving medical bills, childcare expenses or college tuition. If your plan doesn’t offer hardship withdrawals or your reason for needing the money isn’t considered a hardship, your 401(k) plan may offer loans.
Note that 401(k) loans are typically restricted to no more than 50% of your 401(k) balance, up to a limit of $50,000.
More From GOBankingRates
