Advantages Of Having A 401k Plan
Having good and/or adequate financial means during retirement becomes an important factor to all employees at some point in their working career. The United States government currently offers Social Security Benefits to retirement age citizens to supplement their retirement income. However, Social Security Benefits are not guaranteed to be available for people who become of retirement age in the upcoming years. This is one of the many reasons to consider alternative savings plans to fund retirement. The 401(k) plan is a retirement savings plan sponsored by an employer. Employee 401k contributions are automatically deducted from the employee’s paycheck each pay period. This money is taken out before the paycheck is taxed. The contributions
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Therefore, they end up paying a smaller amount of tax on the money. The 401 (k) plan is not synonymous with a pension plan nor was the plan intended to be a replacement as a pension plan for employees. The advantages of having a 401(k) plan outweigh those of having a pension plan. The biggest difference between a 401(k) plan and a traditional pension plan is the distinction between a defined benefit plan and a defined contribution plan. Defined benefit plans, such as pensions, guarantee a given amount of monthly income in retirement and place the investment risk on the plan provider. Defined contribution plans, such as the 401(k) plan allows individual employees to choose their own retirement investments with no guaranteed minimum or maximum benefits. The employees assume investment risks in defined contribution plans. A pension plan presents individual employees with a significantly lesser amount of market risk than 401(k) plans. However, the 401(k) plan offers more flexibility and control to the employee. Pension plans have a pre-determined …show more content…
Many economists suggest the tax savings referenced are not really savings at all. In an article found in the fiduciary News and written by Christopher Carosa, he reports,” veryone agrees if the tax rate is lower, then saving in a tax-deferred vehicle like a 401k is a good idea. There are many who believe it’s a wash if the tax rate is the same and a bad idea if the tax rate is higher.
There’s an easy way to test this hypothesis. We took a simple example where an employee contributes $100 per month. This employee is in a 15% income tax bracket and at 15% capital gains tax bracket. We then calculated growth over three time periods: 10 years, 20 years and 30 years. We then compared the taxes and savings for two scenarios: One where all the savings was after tax and one where all the savings was pre-tax. Here’s what we found assuming an 8% growth rate:
Therefore, they end up paying a smaller amount of tax on the money. The 401 (k) plan is not synonymous with a pension plan nor was the plan intended to be a replacement as a pension plan for employees. The advantages of having a 401(k) plan outweigh those of having a pension plan. The biggest difference between a 401(k) plan and a traditional pension plan is the distinction between a defined benefit plan and a defined contribution plan. Defined benefit plans, such as pensions, guarantee a given amount of monthly income in retirement and place the investment risk on the plan provider. Defined contribution plans, such as the 401(k) plan allows individual employees to choose their own retirement investments with no guaranteed minimum or maximum benefits. The employees assume investment risks in defined contribution plans. A pension plan presents individual employees with a significantly lesser amount of market risk than 401(k) plans. However, the 401(k) plan offers more flexibility and control to the employee. Pension plans have a pre-determined …show more content…
Many economists suggest the tax savings referenced are not really savings at all. In an article found in the fiduciary News and written by Christopher Carosa, he reports,” veryone agrees if the tax rate is lower, then saving in a tax-deferred vehicle like a 401k is a good idea. There are many who believe it’s a wash if the tax rate is the same and a bad idea if the tax rate is higher.
There’s an easy way to test this hypothesis. We took a simple example where an employee contributes $100 per month. This employee is in a 15% income tax bracket and at 15% capital gains tax bracket. We then calculated growth over three time periods: 10 years, 20 years and 30 years. We then compared the taxes and savings for two scenarios: One where all the savings was after tax and one where all the savings was pre-tax. Here’s what we found assuming an 8% growth rate: