5 Little-Known Perks of 401(k) Plans

Employer-sponsored 401(k) plans are some of the most popular retirement accounts, and nearly 35% of working-aged Americans have one. Since you can sign up for one at work, they require less effort than opening a retirement account with a brokerage firm.

Some common benefits of 401(k) plans include employer matching programs that allow you to quickly boost the total amount of contributions in your account. But there are many other 401(k) perks that many people don't know about.

Here are five you should know about and how to take advantage of them.

1. Some 401(k) contributions reduce your taxable income

Your 401(k) plan has several tax advantages, including reducing your taxable income for the full year if you have a traditional 401(k).

For example, if you're a single taxpayer earning $120,000 and take the standard deduction on the 2024 tax filing of $14,600, your table income for the year is $105,400. But if you contribute $6,000 to your 401(k) during that year, you'll lower your taxable income to $99,400.

In this scenario, your 401(k) contributions push you down to a lower tax bracket, and you pay a 22% marginal tax rate instead of 24%.

2. You can take out a loan

Some plans allow you to take a loan from your 401(k). While taking a loan out of a retirement account is not usually advisable, it can be a better option than using high interest credit cards for large expenses you can't pay off right away.

Most 401(k) will let you borrow up to 50% of your vested account balance, up to $50,000. You'll have to repay the loan within five years, with interest, and your plan provider typically sets the rate.

When you take out the loan, you don't have to pay taxes or penalties, and the interest you pay goes back into your 401(k) account. Also, if you miss a payment or default on your loan, it won't impact your credit score because 401(k) loans aren't reported to credit bureaus, according to Fidelity.

Keep in mind that if you leave your job while you still owe money on the loan, you may have to repay it in full before you switch jobs.

3. You can make catch-up contributions

There's an annual cap on how much you can contribute to your 401(k); in 2024, the amount is $23,000. But if you're 50 or older, you can make catch-up contributions to your retirement account.

The catch-up contribution amount for workers who are 50 or older is $7,500, which means those workers can contribute up to $30,500 in 2024. That's a lot of money, and many people may not be able to contribute that much, but it's good to know that you can make extra contributions as you get closer to retirement if you need to.

4. It's protected from creditors

In most cases, your assets in a 401(k) are protected from claims by creditors. This means that if you ever go through bankruptcy, creditors likely wouldn't be able to touch your 401(k) balance. There's also no limit to the amount that's protected. If you have $2,000 or $2 million in your 401(k), creditors typically cannot go after this money.

The exception to this is that in some court orders involving divorce, child support, or civil judgments, some or all of your funds could be claimed. The same goes for delinquent federal taxes.

5. Some 401(k) plans let your money grow tax-free

You may have heard of Roth IRAs, which allow you to put money into a retirement account and let it earn money tax-free. The good news is there's a version of this for 401(k)s called the Roth 401(k).

If you sign up for a Roth 401(k), your contributions will be taxed when you put the money into the account. But when you withdraw money in retirement, you won't owe any taxes on them. This works differently than a traditional 401(k), where you can lower your taxable income when you make contributions but are taxed on your retirement withdrawals.

Another important thing to note about Roth 401(k) is that in some cases, an employer's matching contributions may go into a traditional 401(k), while your contributions are placed in Roth 401(k). Employers used to be required to put their matching contributions into a traditional 401l(k) but can now opt to have them directly in the employee's Roth 401(k).

Don't be overwhelmed by these plans

401(k) plans can sometimes be confusing, especially if you're just starting out in the workforce and signing up for one. But knowing some of the perks of these plans can help you better understand why having one is a good idea.

While 401(k) plans aren't perfect, they offer many Americans an easy way to automate their retirement investments and potentially earn free money through employer contributions, which may be one of the best 401(k) perks of all.