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Why Now is a Good Time to Start a 401(k)

Dylan Telerski / 4 Aug 2020 / Business

4 coworkers look at financial paperwork together, wearing PPE to prevent the spread of coronavirus

It may seem counterintuitive to put money into a 401(k) amid Stock Market volatility, but that’s just what financial advisors are recommending. It’s not just a matter of doing your part to keep the American economy afloat, but historically speaking, it’s a matter of good investment.

Here’s why:

It’s a buyer’s market.

“Buy low, sell high” is the conventional wisdom. The opportunity to buy a greater volume of stocks at rock-bottom prices is now! Beginner 401(k) investors can put a small, fixed amount – say $1,000 – into their account every month, regardless of how bleak the situation appears. They can invest in undervalued stocks that pay dividends. By contributing to an employer-sponsored 401(k) plan, retirement savers can choose a diverse portfolio of stocks, bonds, and alternative investments to invest in.

The economy will bounce back.

Here’s the good news: since 1900, the average economic recession has lasted 15 months with an average cumulative loss of 38 percent, while the subsequent expansion has lasted 6.5 years, with returns averaging 339 percent. While you can never guarantee what will occur this time around, history indicates “what goes down must come up.”

There are short-term savings to consider.

If you’re an entrepreneur, the cost of starting a small business 401(k) is deductible on your taxes. In fact, thanks to the SECURE Act passed last year, you may be eligible to receive a tax credit of up to $5,000 per year for the first three years of the plan.

On top of that, if you sign up your employees using auto-enrollment, you can add an additional $500 tax credit per year for the first three years. PLUS, you are eligible to write off 100% of the matching contributions you make to employee plans AND 25% of whatever your employees put into their own plans as well.

Your employees will be able to deduct up to $19,500 off their income tax burden if they elect to contribute up to the 2020 maximum. Those over 50 who got a late start can throw in an extra $6,500 on top of that. If you are contributing to your own 401(k) as both business owner and employee, you can put away up to $57,000 in tax-free income this year to reduce your liability to Uncle Sam.

There are long-term benefits, too.

For business owners, a 401(k) is one of the most competitive benefits you can offer your employees – not to mention, it is less expensive to run than a health care program. Providing workers with financial security boosts the morale of younger workers and enables older workers to leave when they are mentally ready, rather than sticking it out long after their motivation has dwindled because they can’t afford to retire.

For individuals, saving money for the future in a tax-deferred 401(k) account allows any profit and interest gained to compound over the years. The average return over a decade has been a steady 7 percent, which outpaces inflation and sets you up for a comfortable monthly stipend when you stop working. So, for a younger worker, a $5,000 balance today could be worth $57,900 in 35 years.

It’s best not to try to time the market.

The Stock Market is unpredictable at best. As Heraclitus opined, “The only constant in life is change.” Investments generally tend to boom during bull markets and shrink during bear markets, but there are still safer places to park your money during a slide.

Most investors will look at a middle-ground defensive strategy that involves rebalancing the portfolio with more put into stable, large-cap companies that are less affected by economic downturns or a long-term target-date fund. After all, Americans are still buying toilet paper, food, and other necessities. Shifting money away from less-secure growth companies is equally wise, as many of these upstarts lack the financial security to survive.

If you have any questions, contact Ubiquity, a leading 401(k) plan provider that small businesses have relied upon for flat-rate service with no hidden fees since 1999.

© 2021 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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