masikafinance

Like anything else, every investment has benefits and downsides. Saving for retirement
is no exception.
Here are some of the benefits of 401k:

1. Tax advantage especially the traditional 401k/403b. For instance, if you earn
   $100,000 and contribute $20,000 to traditional 401k, then you will pay taxes on
   $80,000 of the income.
2. Employer free money through matching. That is, if you contribute 5% of your
   annual income of $100,000 which is equivalent to $5,000, then the employer also
   contributes to your account $5,000 and essentially you will have $10,000 in total.
3. Your money has the potential to grow on average 7% every year. Overtime, you
   may accumulate wealth investing in 401k.
4. Generally, 401k is protected by federal law from most creditors and bankruptcy
   protection. This makes 401k arguably a safer investment.
   These are some of the common downsides of 401k:
   1.Taxes on withdrawal. Unless you have a Roth plan, you pay taxes when you withdraw
   funds from your account now or even after you retire.
5. Access to your 401k whether traditional or Roth is limited until your retirement age.
   IRS guideline is 59.5 years. In simple words, your 401k is intended only to be accessed
   when you retire.
6. Penalty on early withdrawal. If you withdraw funds from your retirement account
   before the age of 59.5, then be ready to pay a 10% IRS penalty. Exceptions exist per
   IRS guidelines, especially emergencies, medical expenses not covered by insurance
   and first-time home buyer.
7. Fees charged by administrators of the plan. Almost all custodians charge a small fee
   for custody of your funds. Although small, these adds up because a typical person
   invests 20 to 30 years. This can significantly lower your investment. Always read your
   quarterly statements and review expense ratios.
   Savage Opinion: 401K benefits outweigh the downsides especially if your employer
   offers matching. This is true with employers that match at least 5%. Anything less than
   5% matches from your employer, reserve the right to talk to a financial advisor.