401(k)? Yes

Q Should I contribute to a 401(k)? — J.R., Columbus, Ohio

A Definitely consider it if your employer offers one. With a traditional 401(k), your employer plunks a portion of your salary that you specify into the account. That contribution comes from pre-tax income. So if your taxable income is $50,000 for the year and you contribute $5,000 to your 401(k), your taxable income will fall to $45,000. Your tax bill will be smaller, and you’ll have some pre-tax dollars invested for the future.

Your contributions will grow untaxed until you withdraw them in retirement, as you must generally do starting at age 70 1/2. Then they’re taxed at your ordinary income rate.

Money in a 401(k) can usually be invested in a variety of things. We recommend broad-market stock index funds, such as ones based on the S&P 500. It can be good to balance that with some bonds, too, but less so the further you are from retirement.

Best of all, many employers match a portion of your 401(k) contributions. If your company does so, make the most of it — that’s free money!

Note, too, that you may also be able to opt for a Roth 401(k) plan, where your contributions are post-tax and withdrawals in retirement are tax-free.

Q I know inflation decreases the value of money over time. Is there any upside to it? — N.R., Spokane, Washington

A Here’s one: If you’re making fixed mortgage payments, inflation can make the dollar value of those payments worth less over time. For example, if you’re earning $50,000 annually now and paying $1,000 per month, that $1,000 will be a smaller portion of your income in 15 years, if your salary grows along with inflation.

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