With 401 (k) plan, employees can save tax-free money

19 January, 2012

There is a lot of fuss about 401 (k) plans in the US and rightly so as the plan, besides the tax-free savings helps the employees to invest for the long times in a risk-free manner and last but not the least, they can change it from employer to employer.

ONE OF the major benefits of the retirement plan, 401 (k) is that an employee can defer income taxes to save for his retirement. Though controlled by the employer, 401 (k) plan allows a person to choose the portion of his salary that he can contribute to the plan. While competent plans also allow tax-free withdrawal but you can only contribute after-tax income with those plans. For 401 (k) plan, you can deposit and withdraw tax free money but the only rider is that you can withdraw only after the age of 59 ½ years, except under special circumstances.

The plan in named after a section 401 (k) in the revenue records of the state that was authorised in 1978. Before the employee’s paycheck could be deducted, the amount that has already been agreed to is deducted by the investment company or the bank that the employee has set up an agreement with.

“Withdrawals before that age are typically subject to 10% penalty (as well as income taxes),” according to Wall Street Journal. Though the plan has been criticised lately for the little money, employees have managed to save. But according to USA Today, companies are rolling out more affordable and low cost plans. “The new plans are aimed at helping small and midsize employers, which in the past have been unable to offer their workers the lowest-cost plans. Their workers make up 43% of all plan participants, according to the paper.

To make it more popular among the working class, factors like individual’s age, income and life changes would be used to develop customised plan that will be modified and balanced with every passing year. Low wage employees haven’t seen many benefits as they couldn’t save and contributed less to the plan but the companies like Lincoln Trust have taken care of them as well and a low-cost plan has been launched.

Besides the tax deductions, the plan has been a hit among the employees because of its portability as they can change the plan with the change in their employers and last but not the least, an employee has the freedom to decide his investments, though they are for a long time.