6 Key 401(k) Benefits That Make It a Must-Have for Tech Employees
Working in tech can lead to a solid financial future if you’re smart with your money.
You can expect to experience ups and downs due to the equity you receive, but whether you’re at a large company or small start-up, your 401(k) is going to be one of the best tools you have for building your wealth.
In this article, we’ll explore 6 benefits why we believe your 401(k) is the best perk of your job, and why you should give it a little more love and attention.
If you properly utilize your 401(k), you can approach retirement with well over a million dollars in your 401(k).
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#1 Benefit of a 401(k): Automated Investing
The hardest part about investing is clicking the buttons that turn your extra cash into an investment.
One of the most common problems individuals run into with investing is that they put way too much thought into when they should be investing.
If you have leftover cash, the answer is that you should probably be investing now.
And that’s what’s so nice about a 401(k). Since your 401(k) automatically takes a piece of your paycheck and invests it for you, it removes your thinking from the “when to invest” decision (and that’s a good thing!).
Automating your retirement investments allows your 401(k) to become the workhorse of your investment portfolio.
#2 Benefit of a 401(k): Effortless Diversification
The automated investing benefit of a 401(k) is overlooked, but what’s overlooked even more and is just as amazing of a perk is that 401(k)s provide you an automated way to diversify your investments.
Although most of the investments within 401(k) plans may not jump off the screen as super exciting, you shouldn’t underestimate them.
Investments within your 401(k) will typically include a handful of options in each of the following categories:
Target Date Funds
U.S. Stock Index Funds
International Index Funds
Real Estate Funds
Bond Funds
Can you guess what each of these types of funds has in common?
They each will own more than one single investment. Any fund within your 401(k) will typically represent an investment in hundreds or even thousands of different companies.
If you work in tech, odds are good that you’re pretty heavily weighted towards one particular stock that moves up and down often.
By investing within your 401(k), you’ll be able to spread out your risk and put money in things other than the company you work for. That automatic diversification is a huge perk!
#3 Benefit of a 401(k): Tax Deferral
Another huge perk of a 401(k) is that it allows you to defer/avoid taxes now.
If you put $10k of pre-tax contributions into your 401(k), you’ll avoid both Federal and State income taxes on the full $10k.
If you happen to live in California and find yourself in the highest tax bracket, avoiding taxes on that $10k could mean saving about $5k in taxes between Federal and State!
For individuals in or near the highest tax brackets, it often makes sense to put as much money into your 401(k) as possible to avoid paying those taxes now.
The two biggest factors on how much pre-tax contributions you want to make to your 401(k) are:
Your tax bracket now versus your tax bracket in retirement
Your State of residency now versus in retirement
If you’ll be in a lower tax bracket during retirement, avoiding taxes now often makes sense.
If you’re living in California now and expect to retire somewhere where there’s less or no State income tax, then pre-tax contributions also make a lot of sense.
#4 Benefit of a 401(k): Employer Matching is Free Money
If you were to find $100 on the ground, you’d be thrilled.
For whatever reason when people contribute to their 401(k) and receive a few hundred dollars automatically matched into the retirement account there’s not the same exhilaration.
It probably has to do with the fact that a 401(k) is a retirement account, but getting free money from your employer is one of the single best perks there is.
Companies offer different matching percentages, but the typical range is 3% to 6%.
Some companies also contribute without a match and/or offer some sort of profit sharing that goes into the 401(k).
One of the wisest financial moves you can make is contributing at least the minimum to your 401(k) to get free money from your employer.
#5 Benefit of a 401(k): Mega Backdoor Roth for High Earners
A big (and growing) benefit of 401(k)s is that many companies allow you to do what is called a Mega Backdoor Roth Conversion.
A mega back door Roth allows you to contribute extra money above the typical limits of $23,000 for 2024.
The extra dollars can either automatically or manually convert to then be categorized as Roth.
Roth assets are an extremely beneficial type of asset because you opt to pay taxes now, to then not have to pay taxes ever again in the future.
#6 Benefit of a 401(k): Roth Conversions Potential in Early Retirement
Another benefit of adding pre-tax dollars to your 401(k) is that the contributions can be converted to Roth in early retirement (or whenever is advantageous).
“Converting” just means you pull money from your 401(k), pay taxes on it (usually from a savings account), and then slide the money into a Roth IRA.
Depending on when you retire, there’s often a 5-10-year span where you don’t have a salary, haven’t started social security, and aren’t required to pull from your 401(k) or other retirement accounts.
Because people often don’t have a lot of income during this time, it usually means that they’re in lower tax brackets.
In these low-bracket years at the beginning of retirement, it can be hugely beneficial to pay taxes to move some assets into your Roth bucket of assets.
We’ve done Roth conversions with clients who were in their early 60s and it often results in saving hundreds of thousands of dollars in taxes!
Conclusion: Why 401(k) Plans Are Essential for Tech Employees
401(k)s are versatile, provide an automated way of investing, provide access to great funds, and offer a lot of flexibility later in life. We see them as the unsung hero of your investment portfolio!
Although 401(k)s may seem unexciting, the solid financial foundation they help build makes them one of the best perks for tech employees.
If you need help reviewing your investments or reviewing your specific 401(k), we’re happy to tell you exactly what we think you should be investing in and we look forward to chatting with you.
Please send us an email at team@equityftw.com. Thanks for reading!