6 Disadvantages and Advantages of 401k

In the United States, one of the options of employees to save for retirement is the 401k plan. This most common defined contribution retirement plan is employer-based and free from federal taxation since money taken out from the employee’s paycheck and invested in the stock market or bond funds before taxes are taken out. Also, it is appealing to some since it can be transferred to an individual retirement plan if the employee resigns from work.

However, people are contentious about 401k, with some finding it beneficial for employees and other finding it more of a disadvantage. Here are some of the pros and cons of this retirement plan.

List of Advantages of 401k

1. Matching Savings
One of the advantages of investing in 401k is that there are employers who offer plans as well as match the contributions of the employees. By doing so, the account value of the money will be increased since the employee will also put in the same amount of money in the retirement savings of the employee.

2. Optional
Another good thing about 401k retirement plans is that the employee has the option to save for retirement and at the same time is free to sign up for other retirement plans. This does not tie a person and keep him from choosing what he thinks will be for his best interest.

3. Less Taxable Income
The money saved in a 401k is taken out of the salary of the employee before it is taxed by the government. This means that not only will a worker have money to save but also, taxable income is reduced. In effect, money earned by the worker is saved and at the same time the employee will not be burdened with too tax payments.

List of Disadvantages of 401k

1. Withdrawal Fees
Critics of 401k plans say that if an employee wishes to withdraw the money from the 401k before a given period, there is a fee for early withdrawal. If emergencies happen, the employee will not be able to get his money’s really value because of the payment to be made.

2. Forced Withdrawal
Aside from a fee to be paid for early withdrawal, an employee with 401k has to withdraw his money when the age of 70 onwards has been reached. This is alright if the employee wants to retire but with the increasing age of retirement, an employee who is still capable of working past the age of retirement will not be able to save for 401k.

3. Imposed Waiting Periods
Critics of 401k say that employees should be given the option to start saving as early as possible. In this type retirement plan, the employee needs to wait for a certain period before he can sign up for his 401k and this can last up to a year. Although this is not really a problem, there are those who want to start saving so they will not be tempted to spend their hard-earned money on purchases that are not necessary.

Saving money in a 401k retirement plan has benefits but not all find it favorable. For employees, it is important to have retirement options and it helps to weigh the pros and cons of such plans, as in the case of 401k to discern if this is the best way to go.