According to Fidelity’s Q2 2024 retirement analysis report, the number of 401(k) millionaires in the US reached another record high, 497,000, up from 485,000 in the preceding quarter. Fidelity attributed the steady growth over the last few quarters to an improving macroeconomic landscape and more 401(k) participants starting early and steadily contributing to the employee-sponsored plan over the years. Average 401(k) balances of accounts managed by the wealth management firm also increased 13% year-over-year to $127,100, the third-highest figure. The savings growth momentum was led by GenX 401(k) account holders who have been saving for at least 15 years. Their average account balances increased to $554,000 in Q2 as the average contribution remained over 14% of their paycheck. While many 401(k) benefits exist, account holders increasingly use the plan to free up more cash via tax breaks and speed up net worth growth by utilising employer-match options.
Higher Contributions To Lower Annual Taxes
Employee-sponsored 401(k) accounts are known for their multiple tax benefits and steady growth potential. 401(k) contributions reached record levels this year. The first direct benefit is that contributors will enjoy significant tax breaks on their investments and annual income tax returns. 401(k) contributions are tax-deductible; hence, they are offset against your annual taxable income. A 2024 401(k) contribution limit of $23,000 can offer significant tax relief for individuals of all income groups and boost cash flow. Capital gains on investments in stocks or mutual funds made through 401(k) accounts, which are also exempt from taxes, offer more leeway to grow your pre-tax money faster with the power of compounding.
Maxing Out 401(k) Employer-Match Option
Principal Financial Group research revealed that 62% of workers think leveraging 401(k) employer-matching is essential to reaching retirement goals. Companies offer to match your 401(k) contributions, sometimes up to 6.99% of your annual pay, which is basically free money. Suppose your employer offers a 5% match on your 401(k) contributions. If you earn $60,000 and start contributing 5% or $3,000 annually, your employer would match that with an additional $3,000 from their pockets. Considering average market returns of 8%, you would have earned over $1.6 million by age 65 if you began fully utilising the employee matching option at age 25. The retirement corpus shrinks by almost half to $842,343 without employer-matching benefits. 401(k) participants increasingly acknowledge the value of this plan feature, as an estimated 48% of account holders contribute more than their employer-matching limits.
Benefitting From Strong Market Gains
The latest Fidelity report also highlights how 401(k) account holders, especially GenX, have benefitted from the year-long market rally driven by AI-focused tech giants. The S&P 500 benchmark index grew by over 19% year-to-date. When you contribute to a 401(k), your pre-tax money is diversified in funds, including small- and large-cap funds, index funds, and even real estate funds, managed by advisory services groups like Fidelity or the Vanguard Group. The funds can be broadly classified as aggressive growth and conservative income funds. The flexibility to balance between growth and income funds as life’s priorities shift over time also helps 401(k) participants hedge their risk exposure without markedly impacting their growth trajectory.
Keeping Assets Safe With 401(k) Fiduciary Benefits And Protection From Creditors
Although 401(k) contributions continue to trend strongly upward this year, high inflation, muted wage growth, and a US jobs market slump have translated to rising loan delinquencies and real estate foreclosures. In case of delinquencies, courts can direct lenders to recover dues by seizing your business or personal assets. However, lenders often cannot seize 401(k) accounts since these plans are protected by the Employee Retirement Income Security Act (ERISA). Hence, your 401(k) accounts can offer strong creditor protection if you experience sudden financial trouble. The ERISA Act also ensures employers offering 401(k) plans adhere to fiduciary standards like disclosing fees, keeping them reasonable, and curating funds that provide stable returns. Overall, the fund managers are legally required to prioritise your best interests.
Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn’t indicate future returns.
