There are a lot of reasons to contribute to a 401k, which is why more than 60 million people have one and one-fifth of all retirement funds are held in 401(k)s.

One of the top reasons is that what you contribute reduces your taxable income by whatever you contribute. The contribution limit for 2023 is $22,500 and additional $7,500 if you’re older than 50 years old.

One top of that, if your employers matches your contribution, that’s free money. A typical match is between 3-6% of your salary. So not only do you reduce your taxes, you get free money.

A little known fact about 401(k)s is that the money is protected from creditors, even the IRS, in some cases. That’s possible because the money in the plan isn’t technically yours, it belongs to the plan, so it can’t be taken from you. The 401(k) plan is managed by your employer, so they set up a brokerage and administrator who will offer investment options for all the participants.

If you’re a high earner, you may want to set up a Roth 401(k), especially if you expect to be in a high tax bracket in retirement, since the withdrawls are not subject to tax because you already paid the tax when you contributed.

What should you invest in?

Retirement plans usually move more limited options than a regular brokerage account or your IRA, but they will usually have just what you need, which is an index fund or target dated fund. A target dated fund gets rebalanced to become more conservative as you age and get near your retirement year. The idea is that as you get closer to retirement you’ll want more in bonds and less in stocks so it automatically adjusts.

Index funds are a low cost way to get broad exposure to the market and nearly always beat mutual funds because they follow the market and the fees are low. Putting your investment dollars in either an index fund or target dated fund is usually all you need to with with your 401(k).