401 k plan: Benefits and drawbacks

401 k plan: Benefits and drawbacks

When it comes to saving for retirement, we young professionals and entrepreneurs have several options. Apart from start saving early for retirement, one of the most important decisions you must make is to choose the type of plan that will be used for savings. Despite various types of retirement plans in this case I want to focus on the 401K retirement plan.

What is a 401 k plan retirement plan?

401 k plan retirement plan is a defined contribution plan established by employers that allows eligible employees to make tax-deferred their salaries. This plan was accidentally created by benefits consultant named Ted Benna, the early ’80s. The initial purpose of the supplement was 401 k plan savings pension plans but now is one of the most widely used retirement plans in the United States.

Among the first companies to offer 401K retirement plan for their employees they are: PepsiCo, Johnson & Johnson and Honeywell.

401K The name comes from a section of the Internal Revenue Code.

Benefits 401K

401 k plan retirement plan helps save up to $ 18,000 per year (2015). Contributions to this plan are deducted from your paycheck before taxes; ie it is deferred pay taxes until the money is withdrawn from the 401 k planretirement account. The most important advantage of this type of account for your retirement is that you can receive compound interest over long periods of time helping the growth of your investment portfolio.

Another benefit of 401K retirement plan is that there are employers who offer matching contributions made by employees up to a maximum equal to 6% of your salary. For example, if you earn $ 50,000 a year and saves $ 2,000 in retirement account 401K (assuming your employer offers matching 100% of the 4% of your salary) they also added him $ 2,000 in your retirement account 401 k plan.

Also, if one day you change your employer, you are left with contributions to the 401 k plan retirement plan (assuming you already working hard with the company the time required).

Disadvantages of 401K

Despite the benefits of 401 k plan retirement plan, it also has its limitations. For starters, if you withdraw money from the plan before age 59 ½ years will receive a tax penalty of 10%. Also, you are required to immediately start withdrawing money reaches 70½ years which reduces the opportunity for growth in its investment portfolio and requires the withdrawn money is put into accounts where the government can collect taxes.

Your employer established waiting periods for contributions 401K retirement plan you are. They also set the limit on contributions from his salary will match; for example, a 100% or 50% of contributions from their salary.

Finally, knowing that is a 401K retirement plan, and be aware of its benefits and drawbacks you can make an informed decision when choosing a retirement plan that best benefits you.

If your employer offers this type of plan, I suggest you subscribe immediately, and continued to do so Begin benefit of compound interest (a lot more if your employer offers matching contributions from your salary) contributions.