What Are Some Advantages Of A 401K?

What are some advantages of a 401k? Most people know that there is something called a 401k, but only around 50% of employees eligible to contribute to a 401k actually do so. The advantages of having a 401k...

The advantages of having a 401k plan are well known to most people - even those who are not particularly knowledgeable about finances or investing. "Most people know that there is something called a 401k, but only around 50% of employees eligible to contribute to a 401k actually do so," says independent investment analyst and tax advisor Paul DLouhy. In fact, the name comes from the section of the Internal Revenue laws that allow this particular kind of financial planning tool. In short, a well run 401k plan can earn money for you easily and effectively; although a 401k plan will only do as well as the funds or the investments that are available through the plan offered.

DLouhy also points out that another advantage of a 401k is that the company you work for is actively contributing towards your retirement and financial well-being. "You may not particularly enjoy your job - but you can derive some comfort from the fact that a portion of your employer's profits are going directly in your pocket" says DLouhy. To some employees whose company has a generous match, it is almost like getting a bonus in addition to their salary.

Contributing to a 401k plan also means you have a lower taxable income, and as a result will pay less in taxes. And the money you earn on your 401k is in itself tax free. 401k plans can be switched to another employer fairly easily and you can also withdraw from the account if you need to, however there can be penalties.

Regulations governing 401k plans require your employer to issue regular account statements and to make sure you have access to your funds, if necessary. So 401k plans are generally easy to participate in and understand - even to those who are not particularly financially savvy. "There is really no excuse for not having a 401k, even if your company does not match contributions. If you think you can save enough money after taxes while working for you to retire on comfortably then don't bother with a 401k or an IRA, but for the tax benefits alone you should reconsider" advises DLouhy.

As an employee you also exercise a good deal of control over your investments. Many 401k plans offer a wide choice of investments including money market funds, index based stock funds and growth funds. Apart from choosing how much to invest, you usually have some influence over which companies and funds your money is being invested in. You can also choose to make changes every quarter - sometimes every month - as to how you allocate your money towards different investment options. Most 401k plans are flexible enough to allow you to decrease or increase the size of your contributions fairly easily, or even withdraw from the program if you want to.

With all the different - and often confusing - accounts, plans, shares, pensions and other tools out there, the 401k has proved itself to be a popular and versatile retirement tool. Says DLouhy "The 401k has rightly proved to be indispensable to people from every walk of life and at virtually every income level - everyone should start and contribute to one if they have the opportunity"

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