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Pros and Cons of Investing in a 401(k) Retirement Plan. A 401(k) retirement plan is an employer-sponsored retirement savings program that enables employees to save for retirement by making pre-tax contributions.

Pros and Cons of Investing in a 401(k) Retirement Plan

A 401(k) is the dominant retirement plan scheme that most people in the U.S. will use to provide a decent income once they retire. Although not perfect, there are benefits of utilizing this type of investment: High contribution limits (currently 17,500 per year if 49 years old or younger and up to $23,000 if 50 or older in 2014).Income tax benefits include investing with pretax dollars and tax deferred growth on the account until time of distribution.Possible employer matching.Loans in the event of an emergency or financial crisis. There are, however, some challenges with a 401(k) plan. Most plans have limited flexibility as it relates to quality investment options.Fees can be high.There can be early withdrawal penalties equal to 10% of the amount withdrawn before age 59 1/2. The Pros and Cons of IRAs and 401(k)s. When it comes to saving for retirement, the optimal keywords are "tax" and "deferred.

The Pros and Cons of IRAs and 401(k)s

" Put them together and you have the common denominator of two of the most popular individual retirement savings plans. Both the 401(k) plan and an individual retirement account (IRA) are comprised of contributions from pre-tax dollars. Essentially, you won't be paying taxes on the money contributed to the accounts or the interest and capital gains until you begin receiving distributions. And you'll be paying less money to Uncle Sam in the meantime, as the contributions to these accounts will decrease your taxable income. Aside from that, IRAs and 401(k) plans are two very different methods of saving, with advantages and disadvantages to each.

In simple terms, a 401(k) is an employer-sponsored program which, in many cases, offers matching benefits. What Is A 401(k) Retirement Plan: Here Are The Basics. What is a 401(k) plan? Many employers sponsor a retirement savings plan for their employees.

What is a 401(k) plan?

Under these plans, also commonly known as defined contribution plans, you can save money toward your retirement on a tax-deferred basis – that is, you don't pay federal or state income taxes on your savings or their investment earnings until you withdraw the money at retirement. Most people's taxable income – and therefore, their tax rate – is lower at retirement than during employment, so they end up paying considerably less in taxes on their savings. What is a 401k Retirement Plan? A Quick Overview - What is a 401k Retirement Plan?

What is a 401k Retirement Plan? A Quick Overview -

A Quick Overview Employer-sponsored retirement plans are generally grouped into two major categories: defined benefit (DB) and defined contribution (DC). In a DB plan, the employer promises to pay a defined amount to retirees who meet certain eligibility criteria. In other words, the plan defines the benefit to be received. In its most typical form, a DB plan pays a lifetime monthly benefit to retirees who fulfill specific age and service requirements.

In DC plans, the plan defines the contributions that an employer can make, not the benefit that will be received at retirement. In 1978, section 401k of the Internal Revenue Code authorized the use of a new type of defined contribution plan that allows for the employee to make pre-tax contributions to the plan. How It Works Employee 401k contribution are automatically deducted from their paycheck each pay period. Advantages and Benefits 401k plans offer many benefits, but there are restrictions also. What Is a 401(k)? - Personal Finance. A 401(k) is a retirement savings plan sponsored by an employer.

What Is a 401(k)? - Personal Finance

It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account. 401(k) plans, named for the section of the tax code that governs them, arose during the 1980s as a supplement to pensions. Most employers used to offer pension funds. Pension funds were managed by the employer and they paid out a steady income over the course of the retirement. With a 401(k), you control how your money is invested. While a 401(k)can help you save, it has plenty of restrictions and caveats.

To oversee your account, your employer usually hires an administrator like Fidelity Investments. IRA vs. 401(k) - What's the Difference? Credit vasabii/iStockphoto So you’re planning for retirement — and feeling unsure about which product is the best vehicle to get you there.

IRA vs. 401(k) - What's the Difference?

These days, few people have access to “defined benefit” plans like the pensions that may have guaranteed your grandparents a certain payout from retirement through the rest of their lives. Instead, most retirement plans are of the “defined contribution” variety, meaning you (and maybe your employer) contribute a certain amount each month, quarter, or year, but the payout you’ll receive during retirement will be based on the market value of the account.