Like other qualified retirement plans, a 401(k) allows your money to grow tax deferred. This enables you to build capital significantly faster than similar investments outside the shelter of an employer-sponsored plan. Distributions from a 401(k) plan prior to age 591/2 may be subject to a 10 percent federal tax penalty and are included in gross income.

But that's not all. A 401(k) plan offers some additional benefits that make it particularly attractive.

Portability
A 401(k) plan is portable. Unlike some other employer-sponsored retirement plans, you can take your 401(k) plan with you when you change employers.

Within certain limits, the accumulated funds in your 401(k) plan can be rolled over into your new employer's retirement plan without penalty. If your new employer's retirement plan doesn't allow such transfers, you can roll over your funds into a traditional individual retirement account.

Employer Matching
Many employers offering 401(k) plans to their employees match contributions. For example, your employer may add an amount for each dollar you contribute, up to a certain percentage of your salary. That's an automatic return on your investment.

Over the long term, matching contributions can help you to accumulate more retirement assets than plans based solely on employee contributions.

Investment Flexibility
A 401(k) plan can also provide a great deal of flexibility. Most 401(k) plans offer a number of investment options. This means you're able to choose how your retirement fund will be invested. Most plans offer a stock fund, a bond fund, a money market fund, a guaranteed investment account, and company stock. You can be as aggressive or conservative as you wish.

Of course, investments seeking higher rates of return also involve a greater degree of investment risk.

"Catch-Up" Contributions
Special "catch-up" contribution provisions enable those nearing retirement to save at an accelerated rate. Those aged 50 and older before the end of the tax year will be eligible to contribute more than the regular limits. Eligible 401(k) plan participants may contribute an additional $4,000 in 2005, with that amount increasing to $5,000 in 2006.

Final Analysis
If your employer offers a 401(k) plan, you should carefully weigh the benefits in light of your financial situation. A 401(k) plan can form the basis of a sound retirement planning strategy.

© 2005 Emerald Publications
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