Disadvantages Of A 401(K)

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Thinking about a 401K plan? Read on to learn about the disadvantages of a 401(k) plan.

• Money & Finances: Saving • Money & Finances: Taxes & IRS

You know you need to establish a specific long-term savings goal for your retirement. Once you set the goal, you need to find a way to meet it. You've got the right job, but where do you go from there? It can get quite confusing if you aren't careful.

Once you begin making money, it’s time to begin preparing for your financial future if you haven’t already. You need to make an effective budget, live a bit beneath your means, and before it you’ll be able to start saving and that means you should start investing. That’s usually where the problem comes in. People have no idea where to invest.

A very popular way that many people choose is to set up a 401(k) plan to prepare for retirement. These are generally set up through your employer. They do definitely have their advantages, see Advantages Of A 401(k) for more on that. Through these plans, the deduction is made before taxes so you don’t pay taxes on the money until you begin receiving it. The plans are also popular because of their portability. Last, but certainly not least, is that the company you work for may match some or all of the contributions you make.

While these are all great reasons to join a 401(k) plan, they do have their disadvantages as well. Here are a few disadvantages to a 401(k) plan:

  1. There are many complex regulations, tax qualifications, and rules associated with them. They can be a bit overwhelming if you don’t know much about investing. It is important to get the advice of a professional before you make decisions as to where to invest. If you do, you’ll be more apt to make the right choice. This will help you reach your financial goals.

  2. Your employer makes a few of the most important decisions about the 401(k) plan. They set up all of the eligibility requirements. Even though they have to follow guidelines that are in place when it is established, they may not be as great as you’d like them to be.

  3. Your employer can restrict certain individuals from joining a 401(k) plan. For example, you may have to work at least one year before you can join. It may only be available to union or nonunion members. If you aren’t a citizen of the US, you are often restricted. It can also keep part-time employees from joining. Eligibility rules are solely set up by the employer.

  4. No matter how long you pay into it, if you withdraw the money before you are 59 ½, you may have to pay a 10 percent penalty fee. In certain situations, you can withdrawal from your 401(k) as early as age 55.

  5. Though the majority of employers, especially large reputable ones, do match your contributions, employers are not obligated to. There is no requirement that says they have to. The only time there may be a requirement is if the plan is considered top heavy.

  6. In some cases you may have to file the IRS Form 5500 for your 401k plan.

Overall, a 401(k) plan is a good way to prepare for your financial future. Even though there are disadvantages, the good does usually outweigh the bad. For more on the good things about 401(k) plans, be sure to read Advantages Of A 401(k).