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Why 401(k) contribution increases benefit workers

On Behalf of | Nov 3, 2017 | IRS Issues

In 2018, Georgia employees and others in America will be able to contribute up to $18,500 into their 401(k) accounts. This is an increase of $500 from 2017 limits. Although an extra $500 per year may not seem like much, it could result in an extra $70,000 in a retirement account for a 30-year-old who contributes the maximum amount. A 40-year-old who contributes the maximum amount would have an extra $34,712.

If that same 30-year-old kept that extra $500 in cash, that person would have $18,500 in cash by age 67. The 40-year-old would have $13,500 in cash by age 67. The reason why such a small contribution can have such a large impact is due to compound interest. Those who can’t contribute the maximum amount are encouraged to save as much as possible and increase their 401(k) contributions whenever possible.

In addition to a 401(k), a person may benefit from contributing to either a Roth IRA or a traditional IRA. Health savings accounts also may offer tax advantages compared to putting money into a traditional savings account. Famed investor Warren Buffet also recommends putting money into index funds because of their low costs. Robo-advisers may be ideal for those who want to save but aren’t sure how to start or allocate their funds.

Contributing to a 401(k) or another retirement account may allow a person to reduce his or her taxable wages. However, rules related to Roth accounts or early withdrawal penalties may result in an audit or other issues with the IRS. An attorney may be able to review an IRS notice or communicate with the agency on a taxpayer’s behalf. This may increase the odds that an individual is able to get a timely and favorable outcome in a case.