Securing your future with strong retirement plans and firm financial goals is the best way to ensure that your retirement income will be stable and complete. There is a variety of retirement options and investment plans that have been made available to everyone.
Each option has its advantages and disadvantages, and each option promises its own benefit. It is important that you understand all the aspects of the investment that you are making.
One of the most popular ways to ensure your retirement income is the 401(k) plan. This is a retirement savings plan sponsored by an employer, which allows employees to save and invest a portion of their salary before they are charged of their taxes. Money has to be withdrawn from the account first before taxes are paid.
401(k) plans have become more popular among employees since the cost of pensions has escalated through time. While 401(k) plans are originally offered to employees to help them save for their retirement plans, the employee should be able to decide how much investment he should contribute. If you are covered by the 401(k) plans, you can take advantage of the tax benefits but it is important that you understand the disadvantages of this investment option.
Here are some of the reasons how a 401(k) might be the biggest retirement trap ever:
- Limited Investment Options. The plan options that you have depend on the ability of your company’s investment options. This limits you from choosing investment plans that will best suit your personal investing style. If you are working for a small company, you might find an individual retirement account (IRA) more beneficial for your retirement plans, wherein you can choose your own investments, instead of being limited with your options.
- Restricted withdrawals. Once you have started your contribution to your 401(k) plan, you can only withdraw if under special circumstances before you are 59 years and 6 months old. There are certain conditions that you have to remember before withdrawal. Your employment must have already been terminated from the company, you must have experienced permanent disability, or you have been undergoing a financial hardship. Even financial hardships should also be defined, such that if you are unable to pay for your rents.
Once you qualify for an early withdrawal, you should still pay for taxes and you will be penalized by 10 percent of the total amount for early withdrawal.
- The 401(k) covers a vesting period for employees before they are able to keep any matching employer contributions made on their behalf. A lot of companies offer vesting periods, which implies that you will not realize the full employer matching funds until you have been with the company for a specific period of time.
401(k) plan is an important part of your employee benefits package however you should study every aspect and detail of your plan to ensure that you will fulfill your retirement plan goals. You should also assess the design of your 401(k) retirement plan and how comprehensive it is by analyzing the funds and the options presented to you.