After having understood what is 401K retirement savings plan and how it works you must know the benefits an employee gets by contributing towards 401K saving plan.

Following are the main benefits you acquire by contributing to retirement savings plan:

• You get tax benefit by saving on tax
• Employer contribution matched program
• Flexibility and customization of investment
• Portability
• Hardship withdrawals and loan facility

Tax benefits:

As mentioned before, tax benefit is the primary and most attractive benefit of 401K retirement savings plan. Capital gains (your accumulated contribution), interest and dividend do not bear taxation. You can enjoy this tax exemption till you disburse your earnings from 401k retirement plan. During this period these earnings can compound tax-deferred within the account. This is more beneficial for employees who joins the plan at early age and has 30 to 40 years for his retirement. This tax savings makes really big difference to his post retirement plans. Read more…

Employer contribution matched program:

As a step towards attracting more employees and ensuring these employees remain with them for longer periods, many employers pay more money towards 401K retirement plan –matching to contribution of the employee. For example an employer may match 4% percent of employee’s first contribution towards 401k plan. The contribution may be matched by the employer based on the length of service of the employee. For example, an employee with less than 36 months service will get matched employer contribution of 25%, employee with service between 36 months and 60 months will get matched employer contribution of 50%; employees with service between 60 to 120 months will get matched contribution of 75% and employee with more than 120 months service 150%. This means the longer you serve with a company the more benefits you earn.

Owing to the factor that you gain more by contributing large amount towards 401k retirement plan, especially with employer matched contribution program, some people even use this factor as weapon for clearing their credit card debts.

You must be aware that employer matched retirement plan contributions are excluded from the annual limit if the contribution is less than six percent of pre-taxed salary of the employee.

Flexibility and Customization of Investment:

The 401K retirement savings plan provides an employee various options regarding rollover of his assets. Once you become a member of 401K plan you can continue it throughout your life. You have four options:

• If you quit the job, you can continue to contribute towards 401K retirement plan with you former employer. In certain cases you may have to pay some amount to the plan administrator as fees for maintaining your records of 401k account. If you have multiple accounts of such nature, you may be loser as you will have to pay huge amount to the different plan administrators.

• You can rollover to 401k plan of the new employer. Generally, you have this option if you have been offered a job by new company when you are still serving with the present employer. In certain cases this may prove to be the best option as it is easier to rollover from one employer’s 401k account to other’s account. You must know the investment options available with 401k retirement plan of the new employer before you rollover from your previous 401 account. If you feel that there are little choices or the options available with new employer are not beneficial you can go for a rollover to an IRA.

• You can complete the 401 rollover and switch your assets to Individual Retirement Account. By doing this you get the advantage of ensuring comfortable retirement because it permits your capital to retain compounding tax-deferred and provides you optimum control on allocation of assets. There is a limit for rollover of 401K. You can complete a 401k rollover only once in a year.

• The last option is encashment of your proceeds from 401K retirement plan when you quit the job. Considering its drawback it will appear to be a foolish decision to go for this option. Main disadvantage of this option is that you have to pay the applicable taxes and penalty fee of 10%. Cashing out option will be the greatest mistake on your part while exercising your option for retirement plan. This foolishness can be matched only with that of failing to grab the benefit of employer’s matched program. By exercising your cash out option you not only incur financial loss by paying taxes and penalty but also you lose on account of long years of tax-deferred compounding which your account would have earned if you had opted for a rollover. Despite the above fact, a press release issued by the 401K Help centre presents a contrary scenario. According to the press release, 78% employees, especially between age of 20 and 29 years, opt for cash out. About 66% employees, most of them are from X Generation and change their jobs frequently, opt for cash out when they leave their job.

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Category: 401k Plans · Retirement Plans

Tags: 401K Retirement Plan, 401K saving plan.