Advantages and Disadvantages of 401(K) Retirement Plan

The 401(k) retirement plan is a type of defined contributions plan that allows people to the contribution to be defined by the participant. It got its name from the section of the Internal Revenue Code in 1981, which is section 401, paragraph (k), which is the authorization of a tax-deferred saving plan for employees. The plan has been amended a number of times before the present day plan. Nevertheless, it has found to be both advantageous and disadvantageous to people.

There are a number of benefits of the 401(k) retirement plan. Unlike other retirement plans, you are given the opportunity to choose and inform your employer how much of your salary to be put into the retirement plan. It can be up to 15% of the salary each month, but your employer has a limit to the limit to your account. You can try to up the limit if you do not think it is high enough, although there is a limit by the IRS that your total annual contribution does not exceed $15,000. Apart from that, the money that is contributed into the account is before the tax of your salary is calculated. Therefore, there is less deductions to the salary you receive in your hands because of the lower taxable income.

Even better is that some employers are willing to match a portion of your contribution, which is pretty much like free money for your participation. Also, there is the presence of a third party administrator who invests in the mutual funds and other vehicles for you, but under the choice of investments you choose. And in the concern of your employer facing bankruptcy, your retirement money is safeguarded by the Employment Retirement Income Security Act (ERISA) 1974, which states that all deposits made under this plan will be kept in a custodial account so that your money will be safe should anything happen to the employer.

However, like any other retirement plans, there are some disadvantages to this plan as well. To start off, if you decide to withdraw your money before the age of 59翻, you will be taxed and penalized by the IRS after the taxed amount with interest. And if you fail to pay up, there will be a forfeit of your plan. Therefore, it is best if you have a stable savings elsewhere so you will not need to do anything to face this penalty.