401 K's Are Outstanding For Retirement Planning

The 401(k) has its name from the IRC (Internal Revenue Code) of 1978. The functioning of the 401(k) is administered by the EBSA (Employee Benefits Security Administration) of the Department of Labor. The 401(k) retirement plan is funded by employee contribution and a matching employer contribution. The chief aspect of the plan is that the contributions are taken from pre-taxed earnings. The fund accumulates tax-free until it's withdrawn. Most businesses and tax-exempt organizations can create these retirement plans.

The 401(k) plan has a good number of conveniences. Most importantly is that the employee can contribute pre-tax money that reduces the tax paid in each paycheck. Also, the company contribution and any growth in the fund is unhampered by any tax until withdrawn.

The compounding of the fund during a 20 to 30 year period is quite extraordinary. The employee has a great deal of control in the direction of the next contributions. When the company matches your contributions, it adds something extra on top of your own money. All money in the plan can be moved from one company to another unlike pension.

The 401(k) plan is protected by pension laws since it's a personal investment plan. It includes protection from garnishment by creditors but not from domestic cases that incorporate child support.

There are a few disadvantages in the 401(k) plan in that it is hard to get your 401(k) contributions before age 60 (59 1/2 to be exact). The 401(k) is not insured by the PBGC (Pension Benefit Guaranty Corp). Also, the company contributions don't kick in until a certain number of years of service have occurred. The rules state that company matching contributions must either be a 3 year 'cliff' plan (100 percent after 3 years) or a 6-year 'graded' plan.

Employees participating in a 401(k) plan have many options for investment. In most cases a listing of mutual funds. The mutual funds normally include money market fund, treasuries, stock funds and bond funds. Some plans may include investing in company stock and US Savings Bonds. The employee gets to decide how the savings is invested. The employee can also choose at any time to stop contributions.

Financial advisers usually say that the average 401(k) contributor is non-aggressive in terms of their investment options. Stocks have historically outperformed other types of investment, since the 401(k) is a long term investment it should be able to reduce the stock fluctuations.