8 Advantages and Disadvantages of a 401k

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8 Advantages and Disadvantages of a 401k

When it comes to saving for retirement, there are many different options that are available to you. One of the most popular and most used is a 401k retirement plan. It is only offered through employers, but can also be utilized if you are self employed. A percentage of your salary is deferred each month and put into the retirement savings account. Saving for retirement is an essential part of life, it ensures your financial stability in your old age. Understanding all of the options that you have to save for your old age can be extremely difficult, especially if you do not have prior knowledge of investment and savings plans. Let’s examine the 401k plan from all angles so that you can determine if it is the correct choice for you and your life.

Advantages of a 401(k)

1. You Can Have Other Plans
One of the greatest advantages of investing in a 401k retirement plan is the fact that you can still invest into other plans as well. You are not limited to the funds that you obtain through only one form of retirement savings.

2. High Contribution Limits
Many savings plans have low contribution limits, meaning you are restricted on the amount of money you can put into it each month or year. This is to avoid paying large amounts of interest payments to individuals. While 401k does have a limit, it is fairly high, 17,000 annually.

3. Employers Match
The majority of companies that offer 401k plans to their employees match a certain percentage of the contributions that are put in. This is technically free money that they are giving you as a benefit of working with them. The limit that an employer can contribute to an employees plan is 6 percent of their salary.

4. Companies of Any Size
Whether you work for a company of ten thousand people or are self employed, you can take advantage of a 401k retirement plan. A huge majority of businesses in the United States offer this as a basic benefit to all of their workers.

5. Lowers Taxes
Since part of your salary is being put in a federal savings account, you are not taxed on that money. This increases your refund possibilities because it decreases the amount of taxable income that you have to report each year.

Disadvantages of a 401(k)

1. You Are Forced To Withdraw
One of the biggest downfalls of a 401k retirement plan is that there is an age that everyone is forced to withdraw all of their money and they can no longer contribute. This age is 70 and a half years old. That may seem like a reasonable age, but the average age of retirement is increasing steadily.

2. Waiting Periods
There are generally long waiting periods at an employer before you can begin to contribute to your 401k. This waiting period can be up to a year, and is in place to ensure that you will last at the company. Many people dislike this because they want to start saving as soon as possible.

3. Money Is Still Taxed
While you may get an annual tax break for contributing to a 401k, it all comes back to you when you withdraw your money. The money is taxed as a whole, which could eat into a large chunk of the retirement fund that you have been saving for.

Important Facts About 401(k)

  • You can “borrow” up to one half of your retirement plan with a 401k.
  • There is no credit check done for this type of saving plan.
  • Your employer must fully disclose all fees and penalties associated with your plan.
  • 401k retirement plans were not available until the 1980’s, and even then they where only available to a small amount of companies.
  • in 2006 the Pension Protection Act allowed employers to begin auto enrolling employees in this type of plan.