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The 401k is a retirement savings plan which encourages employees to contribute tax-deferred money to a 401k account. The plan has many advantages. The first is obviously the tax deferral. The money that is contributed towards retirement savings occurs before the tax is paid. In many cases, the employer matches the employee’s contribution amount. Both the amounts continue to grow tax-free until the money is withdrawn.
The employee has control over the direction of the contribution. The compounding of the fund is just amazing during the 20 to 30 year period. It can grow quite substantially if you make regular contributions. In addition, the money from a 401k plan can be transferred from one employer to another at the time of job change. When this happens, you will not be levied any penalty for early withdrawal and you will not have to pay any federal or state taxes.
The money is a 401k plan is protected even if your employer goes bankrupt. This means that the creditors cannot lay their hands on the money and neither can your employer use the money to operate the business. Any contribution to the 401k has to be deposited in the trust within 15 days of deduction from the monthly wages.
However, the 401k has some disadvantages. You cannot get the money from your 401k plan before attaining the age of 59 1/2. In addition, there is a vesting period for the employer’s contribution. Before the completion the vesting period, you will not be entitled to the entire money in your account.
When you contribute money to a 401k retirement plan, you will have many investment options. Usually your employer will have a list of mutual funds that you choose from. The mutual funds include money market funds, treasuries, stock funds and bond funds. Sometimes, you might also have the option of investing in US Savings Bonds as well as buying stocks of your company.
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