Retirement Plans Used To Attract New Employees
In days gone by employers offered their employees defined-benefit pension plans. These pensions were usually funded by the employer and the amount set aside every week to go into these plans was fixed. If the employer didn’t completely pay each weekly contribution, the employee usually contributed a portion up to half of the weekly payment.
That tradition has disappeared except for some union jobs and some long standing companies and utilities and some municipal jobs. The 401k plan has replaced those pension programs at most places of employment. And many employers even have matching plans that contribute dollar per dollar what you put into the fund. Employers use this as an employment enhancement when recruiting new employees.
The primary benefit of a 401k retirement plan is the favorable tax treatment it receives from the IRS. Dividend, interest, capital gains and your original wages or employer contributions are not taxed until they are paid back to you as retirement income.
By then with no other income source, you are in a lower tax bracket and pay very little compared to the taxes that would have been due on your investment income and principal weekly contributions. Its like hiding the money away until you need it and then showing it to the tax man when its better for you tax wise.