What is the 401(k) plan, and how can this benefit you during retirement? Read along to learn more about this type of savings, its benefits and some important considerations to think about.
Individuals who are employed have the option to work on their 401(k) plan for their retirement, which is a type of savings funded by your employer’s and your contributions. What’s good about this savings plan is the fact that contributions are deducted from your gross salary. Your money also grows over time, and it is completely tax-free except once you have decided to withdraw from it. Most of these plans are also self-directed, and tax-exempt or for-profit organizations have the option to create this plan for employees.
The US tax code has set rules and regulations for this plan. The 1978 Internal Revenue Code also created the 401(k) plan, and the IRS dictates items to be done with this retirement account savings. However, the US Department of Labor’s Employee Benefits Security Administration regulates how the plans are operated.
Benefits to Expect
There are several reasons why some people choose this retirement plan savings in preparation for their future. For instance, they have the freedom to determine where they want to put in their current savings or future contributions. This is an appealing feature of the plan to most employees since it gives them control over their own investments.
It is also worth noting that 401(k) plans minimizes the tax that employees pay out of their pay check. This is because the savings plan give employees the opportunity to contribute or fund the 401(k) using pre-tax salary. As the money continues to grow, this remains entirely free of tax. It is only upon withdrawal that tax is reflected on the fund. If the money stays in the 401(k) after decades, the compounding effect can be tremendous over a period of time. What’s more, in the case of having the company match your 401(k) contributions, this has the similar effect of having additional money to your salary.
In addition, this is a type of personal investment plan, intended for retirement purposes. With this in mind, the program is secured by pension laws in the country. Hence, it is protected from garnishment or deductions from creditors. An exception, though, is during court cases related with divorce and orders for child support. This gives you peace of mind that your money is safe and can never be assigned to other people.
Points to Consider
While these benefits may seem impressive, there are still some areas to think about with a 401(k) plan. For the most part, accessing your savings can be tough and may cost you some money if you decide to do so before you reach 59 1/2 years of age. This should not be a concern to you, however, if you have no intention to withdraw the money prior to this age since you may have other resources available. Moreover, your account is not insured by the PBGC, yet this is not a surprise considering there are several pension plans that are also uninsured by this organization.
At the end of the day, your choice all boils down to what you think works best for you after analyzing the pros and cons of the options ahead of you. The most important thing is to start setting a financial plan for your retirement to secure a worry-free life in the future.