401k Retirement Plans that Make Sense

What a 401k does

A 401(k) plan (or 403(b) for public and nonprofit employees) enables you to contribute money from earnings to a special savings plan . You have several investment options and, importantly, tax benefits and deferrals. You don't pay taxes on what you contribute. Your employer may also make a contribution. There are no taxes on the earnings until you withdraw the funds.

How you benefit

You benefit three ways over ordinary investing:
  1. Avoid income tax you would otherwise have paid on the amount paid in.
  2. Avoid the tax you would have paid on the earnings from the funds being saved.
  3. Your employer may match your contribution, tax-free for you.
The risk becomes yours
But be careful: The rise of 401ks is a form of "risk shifting" by employers. It's a financial trend reflected by the decline of what is known as "defined benefit" corporate pension plans. Instead, 401k usage represents an increase in "defined contribution" plans.

Furthermore, additional investing risks confront employees:

They probably will be undisciplined in the way they use investing strategy. They may not enjoy sufficient diversification because of limited choices.

They may not be alert to governmental regulations on withdrawals they may make. Substantial penalties are imposed on withdrawals before age 59 1/2.

Comparative benefits and disadvantages

What are the pros and cons of contributing to a 401(k) as compared to the use of an IRA account?
  1. Some 401k plans are limited in the choice of investments you can make.
  2. In IRA accounts, the choices are completely yours. Some 401k plans permit you to invest solely in company offerings and this can become risky.
  3. In some instances you can borrow from your 401k account.
  4. IRA accounts are limited each year in contributions per family, relatively small perhaps, in relation to what you can set aside in 401k programs.
  5. You can have an IRA program along with a 401k. You may have a Roth IRA instead, and this is a point of consideration.
  6. When you change employers, you can roll over your 401(k) into your new company's 401(k) plan. You may be better off, however, rolling it over into a new IRA account.That will give you control over the investments you make, while you continue to enjoy the tax deferrals until you draw on the funds.

Retirement Information UPDATES

  • Is the contribution you make going to be too much for you? In other words do you have enough to contribute after taking family obligations into consideration? We suggest you save as much as you can. There are few opportunities to get the same tax benefits elsewhere.