| What is a 401(k) Plan? | | | | (ERISA) laws. This includes the additional protection |
| A 401(k) plan is a retirement savings plan that is | | | | of the funds from garnishment or attachment by |
| funded by employee contributions with matching | | | | creditors or assigned to anyone else, except in the |
| contributions from the employer. The major | | | | case of domestic relations court cases dealing with |
| attraction of these plans is that they are taken from | | | | divorce decree or child support orders. |
| pre-tax salary, and the funds grow tax-free until | | | | - While the 401(k) is similar in nature to an IRA, an |
| withdrawn. | | | | IRA won't enjoy any matching company |
| Advantages of 401(k) Plans | | | | contributions, and personal IRA ones are subject to |
| Following are advantages of 401(k) plans: | | | | much lower limits. |
| - Since the employee is allowed to contribute to his | | | | Disadvantages of 401(k) Plans |
| her 401(k) with pre-tax money, it reduces the | | | | Following are disadvantages of 401(k) plans: |
| amount of tax paid out of each paycheck. | | | | - It is difficult and expensive to access your 401(k) |
| - All employer contributions and any growth in the | | | | savings before age 59 1/2. |
| capital grow tax-free until withdrawal. There is a | | | | - 401(k) plans don't have the luxury of being insured |
| compounding effect of consistent periodic | | | | by the Pension Benefit Guaranty Corporation (PBGC). |
| contributions which is quite dramatic over a 20- or | | | | - Employer matching them are usually not vested (i.e., |
| 30-year period. | | | | do not become the property of the employee) until a |
| - The employee can decide where to direct future | | | | number of years have passed. The rules say that |
| contributions and/or current savings, giving much | | | | employer matching contributions must vest according |
| control over the investments to the employee. | | | | to one of two schedules, either a 3-year "cliff" plan |
| - If your company matches yours, it's like getting | | | | (100% after 3 years) or a 6-year "graded" plan (20% |
| extra money on top of your salary. | | | | per year in years 2 through 6). |
| - Unlike a pension, all contributions can be moved | | | | 401(k) plans have proven to be popular with |
| from one company's plan to the next company's plan | | | | employees for several reasons, being the tax |
| (or to an IRA) if a participant changes jobs. | | | | deferral, the increased portability of this plan, |
| - Since the program is a personal investment program | | | | employer matching contributions, and the increased |
| for your retirement, it is protected by pension | | | | control associated with self-direction of investments. |