Key
strengths
- You receive "free" money if your contributions
are matched by your employer
- You decide how much to save (within federal
limits) and how to invest your 401(k) money
- Your regular 401(k) contributions are made with pretax
dollars
- Earnings accrue tax deferred until you start
making withdrawals, usually after retirement
- Your Roth 401(k) contributions (if your plan allows them) are made with after-tax dollars; there's no upfront tax benefit, but distributions of your contributions are always tax free and, if you satisfy a five-year waiting period, distributions of earnings after age 59½, or upon your disability or death, are also tax free
- You may qualify for a partial income tax
credit
- Plan loans may be available to you
- Hardship withdrawals may be available to you, though income
tax and perhaps an early withdrawal penalty will
apply, and you may be suspended from
participating for up to six months
- Your employer may provide full-service
investment management
- Savings in a 401(k) are exempt from creditor
claims in bankruptcy (but not from IRS claims)
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A 401(k) plan
is a type of employer-sponsored retirement plan in
which you can elect to defer receipt of some of
your wages until retirement. If you make pre-tax contributions, your taxable income is
reduced by the amount that you contribute to the
plan each year, up to certain limits. The
contributed amount and any investment earnings are
taxed to you when withdrawn or distributed. If your plan allows after-tax Roth contributions, there's no immediate tax benefit, but qualified distributions are entirely tax free.
Most 401(k) plans offer an assortment of
investment options, ranging from conservative to aggressive. |
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