401 (K) is actually a qualified retirement savings Program, established and sponsored by the Companies in US, which enables the eligible workforce to choose wage deferral contributions, prior to taxes are applied for. To put it differently it provides the employees a plan to save and commit a part of their paycheck on post tax or pre-tax basis. Employers, who offer 401(K) plan, can either make an equal or non-elective contribution on behalf of the worker. The company also can include a profit-sharing clause on the plan.
The best attractive thing about this program is the beneficiary doesn’t have to pay the taxes till the time he or she withdraws money from his / her account. This acts just like a supplement to pension plans. Really 401(K) plan came as a substitute to pension plans as the running cost of pension plans were surging dramatically.
The advantages of 401(K) Plan
Very first and the main benefit with 401(K) Plan is that, it gives complete flexibility to manage your investments. It will give you a diverse base for your investment opportunities. Means you are able to spread your savings in mutual funds, government bonds or money markets or any other assets, based upon how old you are and also the date you ought to stop working. But the most widely used and wanted choice is the target- date funds. It acts just like a perfect blend of bonds and stocks. With all the passage of the time, as you approach towards the retirement life, it turns out to be increasingly more conservative. On the initial years it focuses more on growth. As it gets near towards the maturation it stresses more on income. Actually, market experts propagate this strategy vigorously for hands- off investors. It makes great deal of sense for those investors who don’t research or just incapable of picking out the correct stocks and shares. It doesn’t matters what sort of an angel investor you might be, but there is a great investment plan for each and everyone according to their preference and financial conditions.
The highest possible amount of contributions that a staff member is eligible to make in 401(K) plan is set up annually by the IRS. For this current financial year, that is 2013-2014 its $17,500. If you are 50 years old or over it, then you're qualified for an extra contribution of $5,500.
Disadvantages of 401 (K) Plan
Outside of any doubt, this plan is really attractive when compared with other retirement programs however, before you take your call on this, it is better to go deeper on the specifics of this program. No doubt it enables you to save a great deal however it imposes plenty of restrictions and conditions on you. The biggest issue is that you simply can’t make out for the employer’s contribution quickly. You will need to work for longer period of time with the same employer to become beneficiary for 401(K) payments. Moreover you'll find lots of rules and regulations which rule withdrawal of money and related penalties in the event you take out your finances prior to the age of retirement pointed out in the plan.