Retirement is an inevitable part of our lives, a time when there is no chasing the deadlines or feeling threatened by subordinates. It is a time of peace and indulging, which can be enjoyed if properly planned. Many seek the help of professionals dealing in retirement planning services for advice. The numerous aspects of retirement could be quite confusing for a person.
There are various types of retirement plan in the United States, and 401 K is one of the most famous types. This type of plan is ideal for employees who are looking forward to saving for their retirement. However, it requires that employer should have started in the year of the tax reform act in the year 1978. It has been estimated that almost 60% of households today have these 401K plans.
In the section below, a specialist in retirement planning services let us understand some important aspects concerning the 401K plan.
Tax Benefits: The employees have the freedom to choose whether they would like to contribute to this fund by paying tax while saving or while withdrawing in the retirement years. Until the time of disbarment dividends, capital gains and interest are not taxed. Employees can use salary deferral in to the 401 K plan through contributions that are done on pretax basis. The deferred money keeps growing in the account without having any tax liability.
Investment Flexibility: In comparison to other types of retirement plans, the advantage of this type of retirement plan includes the diverse choices, which an individual has in terms of investment. The investment can be done based on risk tolerance. For instance, those not keen on high risk investments can invest in bonds while those willing to take a higher risk can invest in various types of equities.
Withdrawal: There are various reasons for while money is permitted to be withdrawn from a 401K account. This includes reasons like disability, death, retirement, termination from the job and reaching an age of fifty-nine and half years. There are instances when a person may resort to withdrawal outside of these five reasons. Under such circumstances, there is a penalty of 10%
Drawbacks: There are some disadvantages of the 401K plan, one of them include the complexity involved in the withdrawal process. It also requires a vesting period after which the employee is able to keep the contributions made by the employer.