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.
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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.