401(k) Retirement Plan: The Smart Way to Secure your Future

This retirement plan helps you to authorize your employer to deduct a certain amount of money from your salary before taxes are calculated and put it in the retirement account. You may also utilize the cash in the account for investment purposes.

The benefits that you share from the 401(k) plan are as follows:-

1. The money you contribute comes out of your paycheck before taxes are calculated and this means that by contributing to a 401(k), you can actually lower the amount you pay each time in current income taxes.


2. All employer contribution and any growth in the 401(k) account grow tax-free till you withdraw it. Once you start withdrawing the required minimum distribution, you have to pay tax on the withdrawal at your current income tax rate.


3. If your employer's contribution matches yours, the matched amount is your extra gain.


4. The employee can decide where to invest current savings and/or future contributions so that he can get can get maximum returns on his investment.


5. Unlike a pension plan, all contributions can be moved from one company's plan to another company's plan or to an IRA if the participant changes his job.


6. The plan is protected by Pension (ERISA) laws.

Putting down your money into a 401(k) account is indeed advantageous but there are some drawbacks as given below:-

1. It is difficult to access your 401(k) savings before the age of 59 and 1/2 years but it is not impossible. In case of emergency you can withdraw from your account before you reach this age but 10% of your total distribution will be charged as penalty along with the taxes.


2. 401(k) plan is not insured by the Pension Benefit Guaranty Corporation.


3. Employer matching contributions do not become the property of the employee until a number of years have passed.

It is easier to take a loan from this account as you don't have to undergo a credit check or a lengthy approval process. Even the rate of interest is comparatively low and you pay the interest to yourself.

However, there are demerits too. The money out of the account is not growing, there may be fees involved in the process and the loan must be paid back immediately if you change your job. Moreover any default in loan repayment is considered as an early withdrawal forcing you to pay taxes and penalties.

Look closely at how you are investing. Then follow the simple steps given below:-

• If you are investing heavily in your employer's company stock, reduce this amount and spread your investments.


• Adjust your contributions and you can contribute the maximum tax-deferred amount to your 401(k) account.

Your age and your company's plan policy will help you to decide on the strategies you adopt to repair your plan account.

401(k) is an excellent way to plan for your retirement. It helps you to increase your savings and at the same time make money by investing in the plan options. Thus, you can have complete financial security at the time of your retirement with the help of 401(k) Plan.