It’s never been more important to save for retirement. Baby boomers are set to strain the Social Security system in the years ahead. Studies repeatedly show that we fail to save enough on our own for retirement. The earlier you start and the more you save, the more comfortable your later years can be.  Fortunately, it’s never been easier to save in tax-advantaged accounts such as 401(k) and similar plans.

These plans offer a flexible way to cut your current taxes while you accumulate savings. Recently Congress made changes to encourage participation and to make these plans more attractive.  One change is that you could find yourself automatically enrolled in your company’s 401(k) plan as soon as you become eligible. You’ll have the chance to opt out, of course, but you should think twice before you do. Here are some reasons why.

  • Automatic savings can become painless. It’s much easier to save if part of your paycheck goes into the plan before it goes into your pocket.
  • If your employer matches your plan contributions, it’s like receiving “free” money. A 50% match means you receive a 50% first-year return on your contribution – and that’s before any investment earnings.
  • Features such as today’s higher contribution limits and catch-up contributions for older workers were due to expire at the end of 2010. Now they’ve been made permanent, and they’ll generally be indexed for inflation in future years.
  • If you name a non-spouse as beneficiary, that individual can make hardship withdrawals from the plan or preserve the tax benefits if they inherit the plan proceeds.

You’ll also see more employers offering a Roth 401(k) option. This option trades off the upfront tax benefit in return for tax-free distributions when you retire.

So if you find yourself automatically enrolled, don’t rush to opt out. At least try it for a few months before deciding not to save.

In fact, you should consider increasing your contributions if you can afford it.

Please keep in mind that this tip is designed to be of help for you, but is not to be relied upon as advice. It is merely a reminder that there are many choices you have available to you, and that planning is the only way to find the right answers for your situation!  As with any financial issues, make sure you get the right information before making a decision!  If you have any questions, we’ll be glad to help you!