Top 5 Advantages Of Getting A 401k IRA

A 401k IRA is a retirement savings plan that is funded by employee contributions. Often these contributions are matched by the employer. The major benefit of a 401k IRA is that the contributions are taken from pre-tax salary and the funds grow tax-free until withdrawn. Potential employees consider the availability of the 401k IRA as a benefit when considering offers from employers, and employers wishing to get quality applications offer this as a benefit.

There are very few restrictions as to which employer can offer this plan. Both for profit and non-profit and many types of tax-exempt organizations can establish these plans for their employees. The 401k IRA is governed by the rules and regulations set by the US tax code of the Internal Revenue Service in 1978, and enforced by the Employee Benefits Security Administration of the U.S. Department of Labor.

There are many advantages to a 401k IRA plan:

• First, since the employee makes his contribution subject to tax deductions it has the effect of reducing the amount of tax for paid out for each pay check.

• Second, all employer contributions (as applicable) and the earnings of such contributions grow tax-free until withdrawal. This encourages the employee to make as much contributions as they can afford. The impact of compounding with constant contribution levels over a period of 20 to 30 years is quite impressive!

• The third advantage of 401k IRA plans is that the employee can dictate where to direct future contributions and/or current savings, hence giving him/her much control over the investments.

• Fourth, if the employer matches your contributions that would be like doubling your investment, since the moment the matching contributions from the employer are placed in your 401k IRA it ceases to belong to the employer.

• The fifth advantage of the 401k IRA is that, unlike a pension plans, all contributions can be moved from one company's plan to another if a person changes jobs. Sixth it is protected under pension (ERISA) laws, since this is a personal investment program for your retirement. This includes the additional protection of the funds from garnishment or attachment by creditors or assigned to anyone else (except in the case of domestic relations court cases dealing with divorce or child support orders, and similar situations).

Not everything about a 401k IRA is advantageous to the employee, however. There are disadvantages as well. First, it is difficult to access (i.e., take from or withdraw) before the age of 59½. At best, it will probably be expensive, i.e., penalties will be levied. While this is a disadvantage, it is one that is justified. Remember that this is a retirement plan, and the normal retirement plan is 60. Also, a 401k IRA cannot be insured by the Pension Benefit Guaranty Corporation. This disadvantage, however, is not unique to the 401k IRA as many pension plans do not qualify either. Third, as a means to try to keep the employee, the employer may invoke his right that employer matching contributions may not be vested (i.e., become the property of the employee) until after a certain number of years. In this case, the employer may choose among two vesting option: a 3-year “cliff” plan (i.e., 100% vested after expiration of 3 years) or a 6-year “graded” plan (vesting 20% per year starting on the second year and ending on the sixth year).

Ira Contribution