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Retirement Plans Review - The 401k Retirement Plan

 

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Making financial arrangements for your retirement is essential. The earlier you start, the better. Many people find retirement plans perplexing. A popular retirement plan in the US is the 401k retirement plan. Below, we provide an overview of the 401k retirement plan.

Introduction to 401k Retirement Plan

This retirement plan came to life in 1981 was named after the section of the Internal Revenue Code that gave rise to it; section 401k. A 401k retirement plan is essentially an account that is funded through pre-tax payroll deductions while you are employed. The money that has been placed in the account can then be invested across a broad variety of stocks, bonds, mutual funds and other assets. Any capital gains, dividends, or interest is not taxed until it is withdrawn.

Retirement Plans Review - The 401k Retirement Plan

The benefits of a 401k retirement plan

  • Tax advantage - as mentioned above, dividends, interest and capital gains are allowed to compound tax-free until they are withdrawn.
  • Employer-match programs - As an incentive to join their company as an employee, many employers off offer to match a certain percentage of the employee's contribution. So if you are putting in a certain amount, your employer will match this. Each company has their own rules and conditions, so ask your employer or accountant about this.
  • Investment customization and flexibility - you have a range of choices when it comes to investing your assets, allowing for better growth as your money will be spread across a range of assets with varying degrees of risk as elected by you.
  • Portability - You keep your 401k retirement plan with you no matter where you work! If you change employers through your career, you take your 401k account with you and your new employer begins contributions to it.
  • Loan and hardship withdrawals - While the goal of your retirement plan is to have enough money to retire on, you may find at some point in your life an unexpected emergency arises and you need to withdraw from your retirement fund. It is possible with the 401k retirement account to borrow (usually up to 50%) of your fund. Remember however that interest you will have to pay interest on this loan.

Hardship withdrawal is it really a benefit?

Sometimes we find ourselves down on our luck and need urgent funds. You can withdraw from your 401k fund if you can demonstrate that;

1. The withdrawal is essential as you have an immediate and severe financial need - such as avoiding eviction from your home or urgent medical expenses.

2. You have nowhere else to get the funds from.

3. If you are seeking to borrow from the account, the amount of the loan is the amount that you need - not higher.

However, being able to withdraw from your 401k is in some ways a disadvantage. During the days when the pension plan was the go-to retirement plan, there was no chance of retiring without money. It was locked away. This isn't the case with the 401k retirement plan, which allows people to withdraw should they face hardship.

Careful management of your money will make all the difference when you reach retirement. Stay tuned for more information on retirement plans in our next article.

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