There are five major benefits to make investing by means of a 401k retirement plan, which makes it particularly attractive. They are Tax advantage, employer match programs, investment customization and flexibility, portability and loan and hardship withdrawals.
Tax advantage of 401k retirement plans
The primary benefit of a 401k retirement plan is the
favorable tax treatment it receives from Uncle Sam. Dividend, interest, and
capital gains are not taxed until they are paid out.
Meanwhile, they can
compound tax-deferred inside the account. In the case of a young worker with
three or four decades earlier than them, this can mean the variation between
living at the Plaza Hotel or the Budget 8.
Employer match for 401k retirement plans
Many employers offer to match a certain percentage of the
employee's contribution in an effort to attract and retain talent. For example,
according to Starbucks "Total Pay Package" brochure, the company will match a
percentage of the first 4% of pay the employee contributes to their 401(k)
retirement plan.
- Employees
at the company for less than 36 months receive a 25% match
- 36 to
60 months receive a 50% match
- 60 to
120 months receive a 75% match
- 120 or
more months receive a 150% match.
Investment customization and flexibility
A range of choices as to how their assets are invested is
given by the 401k retirement plans. An individual that knows he or she does not
have a high tolerance for risk could choose a higher asset allocation in
low-risk investments such as short-term bonds; likewise, a young professional
could place a heavier emphasis on equities if he was interested in building
long term wealth.
Many businesses allow employees to get hold of company stock for their 401k retirement plan at a discount even though many financial advisors recommend against holding a substantial portion of your 401k in the shares of your employer considering the scandals of Enron and WorldCom.
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