Published on October 2nd, 2018 | by Bibhuranjan0
Merits and Demerits of 401(k) Based Retirement Plans
Though old age brings a break from work, it may also bring stress as you have no more opportunity to earn money. In the best interest of workers, there are different retirement plans which they can choose in their work days, so that they can receive a handsome amount of money when they retire. Among the retirement plans, there is one called 401(k). In this blog post, I will give you a brief introduction to 401(K). In addition, I will discuss some merits and demerits of 401(K) retirement plan, so that you can make an informed decision when you need to deal with this type of retirement plan.
What is 401(k)?
401(k) is a type of defined contribution plan for retirement that allows individuals to define the contribution by them. It was named from the section of Internal Revenue Code in year 1981 that was section 401, paragraph number (k). This section is the authorization of a tax deferred saving plan. Although this type of retirement plan has gone through several amendments, it covers several advantages and disadvantages as well.
There are a number of benefits of the 401(k) retirement plan. Not like many other retirement plans, the individuals are provided the opportunity to opt and notify their employer how much amount of their salary can be contributed into their retirement plan, which can be equal to 15% of salary amount they receive every month. However, the employer has the limit to their account as well.
One can try to increase the limit if he/she does not believe that it is sufficient, even though there is a limit stated by the IRS that someone’s total contribution per year doesn’t exceed the limit of $15,000. The money contributed by the participants is the amount before the tax of calculated salary. As a result, there are very less deductions from the salary you receive in your hands just because of the lower taxable earnings.
Merits of 401(k) Retirement Plan
- This is even better that some of the employers want to match a portion of their employees’ contribution that is like free money to participate.
- It also requires a third party administrator that will invest in the mutual funds or any other type of investment option that comes under the option of investment the individual chooses.
- In case employer may face bankruptcy, the retirement money of that individual remains safe by the ERISA act (Employment Retirement Income Security Act) that was approved in year 1974. According to this act, all the deposits that are made under this plan are kept in the custody account to ensure the safety of the money should something happen to the employer.
Demerits of 401(k) Retirement Plan
Just like any other plan or product, there are few disadvantages and this is no exception in case of retirement plans.
- First of all, if you intend to withdraw your money before 59.5 year of age, you will be charged for tax and penalty by the IRS after the taxed total along with interest.
- If somebody fails to pay up, he/she has to surrender their retirement plan. Therefore, it could be a better option to have a fixed and stable savings account somewhere else where you will not need to face penalties.
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