Why You Need a 401(k) and Why You Should Start One Today

Thinking about retirement can feel like something for "future you" to worry about. With bills to pay, goals to reach, and life happening, setting money aside for retirement might not seem like a priority. But here’s the truth: the earlier you start saving, the better you will all be. One of the best ways to save for the future is with a 401(k).

If you’re wondering what a 401(k) is, why you need one, and how to get started, grab a glass of water, tea, or coffee, and let’s break it down.

What Is a 401(k), and Why Does It Matter?

Many employers offer a 401(k) retirement savings plan. It allows you to put aside a portion of your paycheck before taxes are taken out, letting your money grow tax-deferred. Some employers match your contributions, meaning they give you free money just for saving.

Why does this matter? Because relying solely on Social Security or last-minute savings won’t be enough for the retirement you deserve. Oh, I encourage you to visit SSA.Gov to check your projected social security benefits; you may be surprised, and not pleasantly. It just may not be enough.

Traditional vs. Roth 401(k): What’s the Difference?

Many employers offer both a traditional 401(k) and a Roth 401(k). Here’s the key difference:

Traditional 401(k): Your contributions are made before taxes, lowering your taxable income now. You’ll pay taxes when you withdraw the money in retirement.

Roth 401(k): Your contributions are made after taxes, meaning you pay taxes now, but withdrawals in retirement (including growth!) are completely tax-free if you follow the rules.

Which One Should You Choose?

If you think you’ll be in a higher tax bracket in retirement, a Roth 401(k) might be better because you’re paying taxes now at a lower rate.

If you want to lower your tax bill today, a traditional 401(k) could be the way to go.

Some people split their contributions between both to get the best of both worlds!

The Perks of Starting a 401(k) Now

1. Employer Contributions (a.k.a. Free Money!)

Many companies not all, match your 401(k) contributions up to a certain percentage. If your employer offers a 100% match up to 5%, that means if you contribute 5% of your salary, they’ll throw in another 5%, essentially doubling your savings!

2. Tax Advantages

Traditional 401(k): Lower your taxable income now and defer taxes until retirement.

Roth 401(k): Pay taxes now and enjoy tax-free withdrawals later.

3. Compounding Growth (Your money can make money)

Thanks to compound interest, your money grows on top of itself year after year. The earlier you start, the more time your savings have to multiply. So start now, your future self will thank you!

4. Automatic Savings

Since contributions are deducted directly from your paycheck, saving becomes effortless. You won’t be tempted to spend the money because you never see it in your bank account.

5. Financial Security in Retirement

Imagine yourself traveling, pursuing hobbies, and living without stress in retirement, free from financial worries. A well-funded 401(k) provides choices and peace of mind.

How to Get Started with a 401(k)

1. Check with Your Employer

If your employer provides a 401(k), contact HR to learn about the options, the matching contributions, and the enrollment process.

2. Decide How Much to Contribute

Start by contributing enough to get the full employer match; it’s essentially free money you don’t want to leave on the table. If possible, increase your contributions as you earn more.

3. Choose Between Traditional and Roth 401(k)

If your employer offers a Roth 401(k), consider whether paying taxes now makes sense for you.

If unsure, you can split contributions between both!

4. Pick Your Investments

Your 401(k) isn’t just a savings account, it’s an investment account. This is the part that scares most people. Most plans offer options like mutual funds, stocks, and bonds. If you're unsure, many plans have target-date funds that automatically adjust as you approach retirement. It becomes for conservative as you approach retirement.

5. Set It and Forget It

Once you enroll, your contributions will be deducted automatically. You can increase your contributions over time, but the key is to start now and let time work in your favor.

I like numbers so let's break them down like this:

Let’s say you’re a single filer, earning $70,000 a year, and you typically owe taxes when you file. By contributing to a traditional 401(k), you reduce your taxable income, which means you’ll owe less in taxes.

Example 1:

Without a 401(k), you’re taxed on the full $70,000.

If you contribute $10,000 to your 401(k), your taxable income drops to $60,000, so you pay taxes on a smaller amount.

This could lower your tax bracket, meaning you owe less to the IRS and might even get a refund instead of a bill. The more you contribute, the more you reduce your tax liability today.

Keep More of Your Paycheck (Instead of Giving It to the IRS)

If you’re someone who gets hit with a tax bill every year, a 401(k) contribution is a way to keep more of your money instead of handing it over to the government.

Example 2:

You owe $3,000 in taxes when you file.

If you had contributed just $5,000 to your 401(k), you could have reduced your taxable income enough to owe much less or even nothing!

Rather than writing a check to the IRS, why not pay your future self instead?

Employer Match = Free Money

If your job offers a 401(k) match, you’re leaving free money on the table if you don’t participate.

Example 3:

Your company offers a 100% match up to 5% of your salary.

If you make $70,000 and contribute 5% ($3,500), your employer matches that with another $3,500 doubling your savings instantly!

Even if you don’t care about taxes, a 401(k) match is the closest thing to free money you’ll ever get…so take advantage of it!

A Roth 401(k) Could Save You Money in Retirement

If you think you’ll be in a higher tax bracket later, a Roth 401(k) might be a smart move.

Example 4:

You’re single, making $70,000 now.

You believe you’ll make $120,000+ later in your career (putting you in a higher tax bracket).

By contributing to a Roth 401(k) now, you pay taxes on your income today (while rates are lower) and can withdraw tax-free in retirement.

If you expect to make more money later, a Roth 401(k) is a great way to lock in today’s tax rates while growing your savings.

What If You’re Self-Employed or Not Employed? You Still Have Options!

If you're self-employed, freelancing, or taking a break from employment. You can still save for retirement! You can open the following accounts at many major financial institutions: Here’s how:

Solo 401(k): If you work for yourself, this lets you contribute as both the employee and the employer, which means you can save a lot more.

Traditional or Roth IRA: An IRA (Individual Retirement Account) is a great option. A Traditional IRA helps lower your tax bill now, while a Roth IRA lets you enjoy tax-free money in retirement.

SEP IRA: If you're freelancing or running a small business, a SEP IRA is an easy way to save more for the future without the hassle of a complicated retirement plan.

Play Smart with Your Taxes

If you’re single and always owe at tax time, contributing to a traditional 401(k) can help you lower your taxable income and keep more of your money.

• Want to lower your tax bill? Go with a Traditional 401(k).

• Want tax-free withdrawals in retirement? Choose a Roth 401(k).

• Want the best of both worlds? Split your contributions between both!

  
  

The key is to start now, even small contributions can make a big difference.

Starting a 401(k) today is one of the smartest financial moves you can make. Even if you can only contribute a small amount, every dollar counts. The sooner you start, the more you’ll have when it’s time to retire.

So, take a moment to check with your employer, enroll in a plan, and start building a financial future you can feel good about!

~Charlie