Before the 1980s, many Americans had employer-managed pension plans. These schemes provided retirees with a regular income after retirement, but gradually went out of favor because of rising administrative costs.
In 1978, section 401(k) of the Internal Revenue Code set out the terms of a new defined contribution plan. Statistics from the 2017 US Census reveal that 79% of employers offer a 410(k)-retirement plan. However, the opt-in rate is just over half (41%). It’s never too soon to think about how you’ll be able to cope financially after you stop work. Online Credit USA are one option and offer easy accessibility to online serve, but what are the pros of this type of retirement planning?
One of the advantages of a 401(k)-retirement plan is the implications for your taxes. As contributions are deducted before tax, this effectively reduces how much tax you pay. Also, within certain limits you pay no tax to the IRS until you make withdrawals or your plan matures.
Flexibility & free financial advice
Another benefit of a 401(k)-retirement plan is that it comes with free financial advice. The number of options on offer vary from scheme to scheme, but are 19-25 on average. The administrator of the scheme is on hand to give advice. Although experts recommend that investors diversify, this plan has greater flexibility as investors choose where to invest.
Employees usually also have the flexibility to increase or decrease their contributions at any time according to their personal and/or financial circumstances.
Some employees worry that their 401(k)-retirement plan could be put in jeopardy if their employer has financial difficulties. However, such plans are protected under the terms of the Employee Retirement Income Security Act of 1974 (also known as ERISA). This means that employers cannot use the money in such funds to pay their creditors.
Another benefit of this plan is that employee contributions are matched by theemployer. Rules about how much this is worth vary from company to company, but the most popular tends to be the equivalent of 3% of the worker’s salary. These matched contributions allow your pension fund to grow much quicker than they would have with your individual contributions alone.
Weighing up your options
Of course, a 401(k) retirement plan also has some drawbacks. One of these is restrictive eligibility criteria. You might not be eligible if you work part-time, for example.
Another disadvantage is that as the plan is intended for retirement, you might have restricted access to the funds. Withdrawals might be possible in cases of financial hardship but are accompanied by a financial penalty.
Your employer might also have rules about when their contributions are vested while changing your job might have implications for your participation in your employer’s plan.
Finally, investment options can be limited, and less orthodox investment choices are often unavailable. You should also factor in fees for the administrator of the plan.
For all these reasons, it’s crucial you meet with a financial consulting firm before deciding if it’s the right choice for you.