| The 401(k) Retirement Plan is the very first thing that comes into the mind of anyone planning his retirement. While this is a prominent retirement plan in the United States, it is also applicable in other countries with basically similar financial system as the US. Introduced by the Internal Revenue Code in 1978 and administered by the Employee Benefits Security Administration, it aims to provide employees with a retirement plan from their unclaimed or un-withdrawn salaries. The central corpus fund in the 401(k) Retirement Plan is generated by contributions made by employees through out the country as well as an equal contribution made by the respective employers. One could call this plan an employer-sponsored contribution plan. The biggest advantage of this plan, from the employee perspective is that his contribution towards the plan is completely free of tax, till such times that he withdraws his contribution from the corpus. It is thus clear that with the help of 401(k) Retirement Plan, an individual can postpone income tax on the amount of his contribution, till he decides to withdraw. Though the age when an individual can withdraw from this plan is 59.5 years, money can be withdrawn under special emergency or dire situations. These situations include paying for mortgages, payments which one has to make to stop foreclosures, funeral or educational expenses, expenses envisaged for home improvements, and so on. In the event of withdrawal, a sum of 10% is deducted from the disbursed amount. Investing in 401(k) Retirement Plan makes good sense as you can expect a huge sum of money as and when you retire. If you invest in this plan for 20 to 30 years the compounding benefit of 401(k) Retirement Plan is truly great. This is because the employer is also simultaneously contributing to your savings, which doubles your investment. If you change jobs, you could transfer your accumulated funds of the 401(k) Retirement Plan to your subsequent employers. The flexibility of the 401(k) Retirement Plan allows you to do so conveniently. Of course the tax benefits associated with this type of retirement plan has made it so popular. You can make your savings grow as you continue to defer your tax payments, till you withdraw your savings. Since the employer is also contributing an equal amount to your savings, this naturally becomes a better saving option, benefiting you both in the short and long term. Yet, the 401(k) Retirement Plan is not without its fair share of disadvantages, the first of which is the built-in regulation of 10% deduction on pre-term withdrawals, that is when you withdraw any money before you reach 59.5 years of age. The other disadvantage is that Pension Benefit Guaranty Corp. (PBGC) does not insure the 401(k) Retirement Plan. The other deterrent factor is that depending on individual company policy, many employers would not put the plan into effect, as soon as an individual joins the organization. You might have to put in a few years of service, before you are allowed to participate in the plan. Till such times, your savings would include only the contribution which you make every month, and not the equivalent contribution from the employer. The employer in such cases would start to contribute, after the pre-stipulated period of service is completed. The 401(k) plan increases your scope for investments, though. You can invest in mutual funds such as treasuries, stock funds, money market funds and bond funds. You may also invest in the stock of the company itself and in the American Savings Bonds. You have the liberty to choose which manner you want your savings to be made in. Now that you are aware of both the pros and cons of one of the most popular retirement plans of the country, the lesson to be learnt here is that the 401(k) Retirement Plan is ideal for someone who is confident of putting in long many years of service in a particular company, and who does not foresee too many financial hardships in his or her career. |
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