Pros and Cons of Funding a 401(k)

A 401(k) contribution to a company plan is an ideal way to build up savings for retirement. However, knowing the pros and cons when it comes to funding a 401(k) plan or choosing another way of investing for retirement is also important.

The advantages of investing in a 401(k) plan include matching contributions from your employer. The contribution limits for a 401(k) were increased to $18,000 with people age 50 or over allowed to contribute $6,000 more in 2015, according to the IRS.

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Much like getting free money from your company to add to your retirement savings account. However, it depends on your company having employer-matching funds. Some companies may match your entire contributions while others might add 50 percent of your contribution.

You may need to contribute enough for the matching contribution to take effect. Some companies start matching your contribution when you put in 3 percent of your salary while others might go up to 6 percent for the matching requirements.

Along with possible matching funds, the money you invest in a 401(k) plan is tax-deferred. It won't be taxed until you withdraw it, starting at age 59 and a half and you'll most likely be in a lower tax bracket by then, reports The Wall Street Journal. 

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You can take out loans for an emergency with your 401(k) plan. Employees can be approved for loans if they go through unexpected financial crises. Some employers might look at flexible loans as a disadvantage because it can create administrative burdens. The loans may also depend on the employer's plan.

Other disadvantages include limited options in investment choices. Your investments depend on the employer’s plan. You could have a wider range of choices with an individual retirement account. The fees for certain plans can also be high, according to RKG Financial.

Minimum distributions of your 401(k) are required when you reach age 70 and a half. Like an IRA or Roth IRA, you also receive a 10 percent tax penalty on early withdrawals before age 59 and a half.

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