Most of us whether working for the federal government, state governments, and local authority or in private enterprise will usually have some retirement plan supported or sponsored by our employer. The most common retirement plan is the 401 K plan, a retirement plan that is overseen by the Internal Revenue Service and managed by the employer.

Typically, an employee will contribute a certain minimum amount to the fund and their employer may match this amount on a monthly basis though this is not mandatory. There are several benefits that employees stand to gain from by investing in a 401 K plan. This retirement scheme will provide them with a decent income after retirement for a certain period of time. This means that after retiring from their occupation and attaining a certain minimum age, an employee will be legally permitted to start withdrawing funds from their 401 K retirement plan.

A 401K retirement scheme has huge tax benefits. All funds contributed to this scheme are invested in an interest earning scheme or portfolio and the resulting benefits are passed on to the account holder with no tax deductions. These tax free benefits remain so within the fund until the account holder makes a withdrawal. The contributions made to this scheme are also considered pretax. By contributing pretax dollars to the scheme and letting the funds multiply tax free, it provides opportunities for bigger returns than those under other schemes. There are certain withdrawal benefits permitted by law. If a 401K retirement account holder is faced with financial difficulty or has a permanent disability or similar condition, then they are allowed by law to withdraw funds from their account to mitigate against the trouble and personal problems they encounter.

The scheme also has a few downsides to it. One of these is that these savings cannot be accessed before the account holder attains the age of 59 and a half years. This is according to the law. Withdrawals can only be made once the account holder attains the prescribed minimum age. This can be pretty daunting for individuals that retire before attaining the prescribed age. Those that choose to withdraw without attaining this age will incur a surcharge of 10 per cent. This plan is not insured and the funds have no cover against any risks and are therefore exposed to certain risks. Employers also do not allow the scheme to take effect until the employee has provided services for several years.

Emily is a health, marketing and financial writer. She blogs about a variety of topics ranging from how to keep New Year’s resolutions to how and when you should look into payday loans. She also frequently blogs about the current economy and how this affects job security and other important financial factors.

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