The 5 Most Underrated Benefits of 401(k) Plans

Some of the advantages of saving for retirement in a 401(k) plan or similar retirement plan are well-known, such as employer matching contributions. On the other hand, there are some benefits of investing in employer-sponsored retirement plans like 401(k), 403(b), and 457 accounts that aren’t quite as well-known. Here’s a few you need to know.

1. Higher contribution limits than you might think

It’s well known that the money you contribute to your 401(k) gets you a tax deduction, but many people don’t know how much money they’re allowed to set aside, tax deferred.

For 2024, the contribution limit to your 401(k) is $23,000, and this doesn’t include any employer matching contributions. Plus, if you’re 50 or older, you can contribute an additional $7,500 as a catch-up contribution.

Now, you don’t necessarily need to max out your 401(k) to save enough for retirement. But the point is that if you’re looking for some extra tax deductions, you might have more room than you think to boost your 401(k) contributions.

2. Automated, low-cost investing

401(k) plans take the guesswork out of investing, and usually do it with low-cost mutual funds. Many plans (especially larger ones) use institutional mutual funds that have lower fees than are available to everyday investors.

Your 401(k) typically will have a “menu” of investment funds to choose from, but there are usually some automated portfolio options and target-date funds. If you see options called “Target Retirement 2040,” or something similar, that’s an example of an all-in-one investment option that puts your retirement investing on autopilot.

3. Access to low-interest loans if you need them

Many 401(k) plans allow you to borrow money from your account and pay yourself back (with interest) over time. These loans can be as much as $50,000 or 50% of your account, whichever is less.

To be perfectly clear, it is preferable to leave your money alone in your 401(k) if you can. This isn’t a substitute for using, say, a home equity line of credit (HELOC) to fund a home renovation project, and shouldn’t be used for unnecessary expenses such as vacations. And it’s still important to maintain an emergency fund so you can generally avoid borrowing money to cover unforeseen costs.

However, if you need the money for an unexpected expense, a 401(k) loan can certainly be preferable to using a credit card or high-interest personal loan. The key takeaway is that while you don’t necessarily want to use a 401(k) loan, the added financial flexibility is nice to have.

4. Portability

One overlooked benefit of 401(k) plan investing is that if you end up changing jobs, you have several options with your account. While cashing it out is almost never a good option, you can:

• Leave it in the current plan (this may require a minimum balance).
• Roll the account into your new employer’s plan.
• Roll the account into an individual retirement account, or IRA, which allows for much more investment flexibility. You can open one through many brokerage firms.

5. Great for early retirement

Many people incorrectly think the minimum age to withdraw money from a 401(k) without penalty is 62 or 65. But it’s actually after you reach 59 1/2 years of age.

What’s more, if you are no longer working for the employer that sponsored the plan, you can start taking money out penalty-free as early as age 55 (age 50 if you’re a public safety employee). This is known as the “separation from service” exception and makes the 401(k) a more valuable tool than you might think for those who aim to retire early.

The bottom line

Many employees — especially those who are relatively early in their careers — know that a 401(k) is designed to help them save for retirement, but don’t fully appreciate what an amazing wealth-building and tax-reducing tool it can be. By knowing and understanding the benefits of your 401(k), you’ll be in a better position to set yourself up for financial success, both now and in the future.

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