401(k) Participation Reaches Record Highs. Are You Taking Advantage of This Retirement Account?

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Vanguard says that participation rates in 401(k) plans is at a whopping 83%. Find out how you can invest for retirement, through a company plan or on your own. 

According to a recent Vanguard report called How America Saves, 401(k) participation rates have never been higher. A 401(k) is an employer-sponsored retirement account, and it can be a great way to put money aside for your old age. The report shows a record-high plan participation rate of 83%.

Inflation, high interest rates, and a decline in equity and bond markets have all put pressure on American budgets in recent years. Even so, Vanguard says that, on the whole, people are still investing via retirement plans. An increase in automatic contributions is one reason participation has increased.

All the same, the Vanguard report shows there’s still room for improvement. It says that if 20% of participants boosted their savings by 1% to 3%, they’d be on track to hit their retirement goals.

How to sign up for a 401(k)

If your company has a 401(k) plan, talk to your HR department to find out more. Some companies only let people enroll once they’ve been there for a certain amount of time. Others will match differing amounts and may offer different options in terms of how your money gets invested. Employer matching can be a powerful way to build wealth, as it is essentially free money.

Some companies also offer Roth 401(k)s, which let you contribute money after it’s been taxed and withdraw it — and any earnings — tax-free later in life. A traditional 401(k) works the other way around. You make contributions before tax, and won’t need to pay tax on that money until retirement.

You may have been signed up for your company 401(k) automatically. If not, you’ll need to fill out some forms and decide how much you want to contribute. Either way, make sure you understand how the plan works, particularly any restrictions on what’s called 401(k) vesting. This is the point at which any contributions your employer makes become yours. In some cases, you’ll need to continue to work at a company for a set amount of time before your 401(k) is completely vested.

In terms of how much to put aside, there are a few things to consider. Look at your budget and see how much you can afford to put toward your retirement years. If your employer will match a certain amount of your contributions, try to put in enough to get the maximum employer match. Also think about how much you think you’ll actually need in your old age and what monthly contributions you might need to make to get there.

What if your employer doesn’t offer a 401(k)?

A 401(k) is not an option for everybody. It might be that your company doesn’t offer one. Or perhaps you’re self employed, work part time, or do contract work. If this is the case, you’re not alone. Plus, there are still tax-advantaged ways you can save for your retirement.

One of the most common choices is an IRA. Also known as an individual retirement account, an IRA is a personal retirement account that’s not connected to your employer. Here are a couple of other good 401(k) alternatives:

Roth IRA: Like the Roth 401(k), the difference between a Roth IRA and a traditional one is when you pay tax on your contributions.Solo 401(k): If you’re self employed, a Solo 401(k) or Roth Solo 401(k) is worth considering. It is similar to the company plan we looked at above, but it’s aimed at people who work for themselves.SEP IRA: SEP IRAs are designed for small business owners, their employees, and people who are self employed.

READ MORE: Best IRA Accounts

There are limits on how much you can contribute to an IRA or 401(k) each year. If you’re able to max out your contributions, those tax breaks boost your retirement savings significantly. If you’ve reached your limit and still want to invest more, look into a taxable brokerage account.

Saving for retirement

It can be difficult to prioritize saving and investments if you already feel as if you’re wringing every last cent out of your paycheck. However, making regular contributions over time to an investment account of some sort is a proven way to build wealth. There are no guarantees, but it’s worth knowing that 8 out of 10 of the millionaires surveyed by Ramsey Solutions had built wealth by contributing to their companies’ 401(k) plans.

Look at where your money goes each month and see if there are any ways you can increase the gap between what you earn and what you spend. That might mean cutting back on some non-essential spending, or trying to up your earnings with a side hustle. Even putting a small amount aside each month can add up over time, particularly when compound interest gets to work.

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