What are the benefits of retirement savings vehicles, like 401(k) plans and IRAs?
A. The advantages of IRAs, 401(k) plans, and other retirement saving vehicles are their tax deferred earnings growth. With an IRA, you do not pay taxes on your earnings so long as your money stays in the IRA. Your money compounds faster because of this. In addition, IRA contributions (up to a certain level and with some restrictions) are tax deductible. 401(k) plans offer special tax advantages. You decide how much you want to contribute (within certain limits) and have that amount taken out of your paycheck before taxes are taken out, thus reducing your current taxable income. Some employers provide matching contributions, meaning for every dollar the employee contributes, the employer promises to match it, up to a certain dollar amount or percentage amount. Like an IRA, you do not pay taxes on your earnings until you withdraw the money, and like IRAs, there are penalties for early withdrawals. In some hardship cases, you may “borrow” money from your 401(k) plan.
Related Questions
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- What are the benefits of retirement savings vehicles, like 401(k) plans and IRAs?
