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 The major attraction of these plans is that they are taken from pre-tax salary, and the funds grow tax-free until withdrawn.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