Final answer:
Contributing to a retirement account reduces taxable income, offers tax-deferred growth, and allows for employer matching contributions.
Step-by-step explanation:
The benefit of contributing to a retirement account is that the amount of income that's taxable is reduced. When you contribute to a retirement account, such as a 401(k) or an IRA, the money is deducted from your taxable income, which means you pay less in taxes. For example, if you earn $50,000 and contribute $5,000 to your retirement account, you will only pay taxes on $45,000.
Additionally, retirement accounts, like 401(k)s and IRAs, offer tax-deferred growth. This means that any earnings or interest that your contributions generate will not be taxed until you withdraw the money in retirement. The advantage of tax-deferred growth is that your investments have the potential to grow faster because you're not losing a portion of your earnings to taxes every year.
Furthermore, contributing to a retirement account allows you to take advantage of employer matching contributions. Many employers offer matching contributions as a benefit to their employees. This means that for every dollar you contribute to your retirement account, your employer will also contribute a certain amount, usually up to a certain percentage of your salary. This is essentially free money that you can use to grow your retirement savings.