The Advantages and Disadvantage of the 401k Retirement Savings Plan
The 401k retirement savings plan is mainly an employer-initiated scheme for allowing his employees to defer getting a portion of their monthly salaries until they reach a certain age. These voluntary contributions are accumulated in a retirement savings account and may be invested in typical or non-typical assets. The amount deferred by the employee is not subjected to tax deduction and all interests and earnings gained are all tax free. Taxes will only be levied on the money upon withdrawal.
The funds accumulated in this retirement investing plan are kept in that account until the holder reaches 59 ½ years of age. In the meantime, the holder of the account may acquire loans from their 401k accounts. This loan is not considered taxable income. However, payments made for the loan have to be in after-tax dollars. This simply means that the amount needed to pay the loan will have increased, not only by the interest rate of the loan but also by the amount of tax that needs to be applied to the payment. The advantage being that all earnings from the loan will be funneled back into the retirement fund. It is important to note that taking a loan against your 401k is different than cashing out your 401k. When you cash out a 401k it is heavily taxed and so your best option is to keep it where it is at or to participate in 401k rollover should you change employers.
One encouragement of availing of the traditional pre-tax funded 401k plan is that the employee will be paying less in tax deductions every payday while having the benefit of putting money into his retirement savings. Another benefit to be had from this plan is that all the earnings of the savings fund are tax free and if a loan is made against that fund, the amount of the loan is likewise exempt from taxes.
Also, although the funds cannot be withdrawn until the minimum requirement of 59 ½ years of age has been met, the fund can be used to offset to a certain degree any expenditures made by the owner of the account for medical and health care, besides other emergency situations that need funding.
The 401k retirement funds may be administered by the employee himself or by a trustee who is appointed by the management of the company. In most cases, the employee is allowed to choose either to manage the funds himself or to hand them over to a trustee. The trustee company typically either invests the funds in their own outfit or in businesses they are affiliated with. The possibilities will be limited by the fact that trustee companies cannot involve the funds in a wide variety of business concerns that they will be unable to monitor sufficiently.
Should the employee choose to do the investing himself, he will still be offered some options by the management of the company he is working for. Very often, the employer will offer the stocks of his own company to his employees. Employees with some background in investing may, however, put their money into other kinds of investment, at his own risk.
The one disadvantage of a 401k retirement savings plan is that if the funds accumulated are considerable, so will be the tax deductions that will have to be paid upon “distribution” of funds. This is the main reason why upon reaching the age of 70, holders of these accounts are required to withdraw a certain amount of it annually.
Tags: 401k retirement funds, 401k retirement savings plan, 401k rollover, retirement investing
