What are the 401(k) pros and cons, and how do they impact your ability to save money for retirement?
One of the most common retirement savings plans that’s offered by employers is the 401(k). It’s not perfect, and it may not be the right plan for you, even if it’s relied upon by millions of people. To help you better decide, we’ve compiled a short list of 401(k) pros and cons.
- You can contribute more to a 401(k) than you can for an IRA, about $17,500 plus a $5,500 catch-up contribution (when over the age of 50). This is a sensible option, considering that you can save a large portion of your retirement using this method and when compared to the more limited saving options offered with an IRA.
- Your employer can match the contributions, but not in all cases. Some will offer to match your 401(k), others will offer to match part of it. Even better is that whatever contribution/s your employer makes won’t count against your contribution limit. This means that you could dump $17,500 into the 401(k) in a given year, and your employer could still put that same amount in with a matching contribution as well.
- You’re able to borrow from your 401(k). This is not the case with all plans, but most offer the ability for you to take loans out against your own funds. In most instances, you are able to borrow up to half the balance, something that’s generally capped at $50,000. And if times get tough, you can often take out a hardship loan out that won’t come with a slew of costly penalties.
- Setup is simple and easy. A short form is all that’s required to get your 401(k) up and running. Your employer will usually deduct your contributions right from your paycheck. Most 401(k) plans also let you access them online, too, so you can make any changes or monitor your account.
- Less flexibility than IRA. You don’t get to choose the plan, your employer does. This means that you may not have as many lucrative investment plans to choose from as you’d like there to be. You also may find that the options are limited with 401(k) plans being offered as well.
- New employee waiting periods. Some employers mandate that new employees wait at least six months or longer before they are allowed to participate in any 401(k) plan. While not necessarily a deal-breaker, it can be a frustrating nuisance.