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Mindless way to save--contribute to 401(k)

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McLEAN, Va. (02/18/14)--Forty percent of Americans nearing retirement haven't saved anything, according to Federal Reserve data. And among those who have, the median savings balance is $100,000, not nearly enough to fund retirement ( Feb. 9).
Saving for retirement doesn't have to be difficult or time-consuming--or stressful. One of the easiest ways to save is by contributing to your employer's 401(k) savings plan.
401(k) plans offer unique saving opportunities because:
  • They are an easy way to save. Contributing to a 401(k) is simple. Money from each paycheck is transferred directly into an account. Chances are, you won't even miss the money that's not showing up directly in your paycheck.
  • They offer tax benefits. 401(k) contributions grow on a tax-deferred basis until you start taking distributions. That means if you earn $40,000 a year and put $5,000 into your 401(k), your taxable income for the year will be $35,000. The earnings that accumulate in your account aren't taxed until you start making withdrawals, usually after you reach age 59 1/2. Roth 401(k)s are different in that contributions are taxable income in the year you make them; distributions from the plan after age 59 1/2 generally are tax-free.
  • They don't require timing the market. No one can accurately guess the right time to get into the market or the right time to get out. By contributing to a 401(k) you can "set it and forget it" because you'll be making steady contributions on a regular basis.
  • They might offer an employer match. If your employer offers to match a portion of your 401(k) contributions, you leave money on the table if you don't contribute enough to receive the match. Check with your human resources manager to make sure you're not missing out.
Consider periodically upping your 401(k) contribution. If you get a raise, increase your 401(k) contribution by the amount of your raise or by a portion of it. Receiving a large tax refund or striving to meet a New Year's saving goal also might provide incentive to increase contributions.
For related information, read "Retirement: More to Prepare Than Finances" in the Home & Family Finance Resource Center.