401(k) Plans

Key strengths

• You receive "free" money if your contributions are matched by your employer (subject to your plan's vesting schedule)
• You decide how much to save (within federal limits) and how to invest your 401(k) money
• Traditional 401(k) contributions are made with pre-tax 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 up-front tax benefit, but distributions of your contributions are 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
• Your employer may provide full-service investment management
• Savings in a 401(k) are generally exempt from creditor claims in bankruptcy (but not from IRS claims)

Bear in mind ...

• 401(k)s do not promise future benefits; if your plan investments perform badly, you could suffer a financial loss
• If you withdraw taxable funds prior to age 59½ you may have to pay a 10% early withdrawal penalty (in addition to ordinary income tax), unless an exception applies
• The IRS limits the amount of money you can contribute to your 401(k)
• Depending on the plan type, you may have to work for your employer up to six years to fully own employer matching or profit-sharing contributions