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The Benefits and Drawbacks of the 401k Plan

If you are working in the USA, most probably you have heard of 401k. It is a plan involving your retirement savings and the fund is contributed by the employee as well as the employer. The amount contributed by the employer usually matches with the amount contributed by the employee. The plan has two great attractions, i.e. it is taken from an employee’s pre-tax salary, and once the money goes into the account it becomes untaxable until it is withdrawn.

Opting for 401k plan comes with many benefits but it also has a few drawbacks. Here you will learn some of its major benefits as well as advantages.

The Benefits

1. Tax reduction. Due to the fact that you are already contributing to your pension plan with your pre-tax money, the result will be a reduction in the amount of tax in every paycheck that you receive.

2. The fund that is accumulating in your pension account will become untaxable unless it is withdrawn. If you keep the fund over two or three decades the fund will experience a generous growth.

3. You have all the rights to choose where to place your future contributions and current savings. This provides you with freedom to control how much money you want to invest in any of the accounts.

4. When your employer pays the same amount as your contribution, you can consider it to be an extra money apart from your salary.

5. You can move your entire contribution from one company to the next if you change jobs.

Drawbacks

1. It’s going to be a difficult and costly process if you decide to withdraw your fund before you reach 59 1/2 years old.

2. The plan is not insured under the PBGC (Pension Benefit Guaranty Corporation).

3. Although your employer matches your contribution, the contribution will not become your own property until several years have passed. There are rules in the 401k involving a ‘cliff’ and ‘graded’ plan which need to be adhered to.

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