Advantages And Disadvantages Of 401a Savings Plan

A 401a savings plan is a money-purchase retirement savings plan where the employer determines the contribution amounts, according to Investopedia. The plan allows either the employer or the employee to make contributions. The employer also determines eligibility and vesting schedules.

Also known as defined contribution plans, participants in the plan can make mandatory or voluntary payments, explains ICMARC. Contributions that are mandatory are usually made pretax which reduces the plan holder’s taxable income. Voluntary contributions are usually made after tax and plan holders can contribute up to 25 percent of their compensation. Employers sometimes match an employee’s contributions or the employer adds a fixed-dollar percentage to the plan. …show more content…
Upon leaving employment, account holders can withdraw money from the plan as they see fit. However, plan holders normally do not need to make withdrawals until the age of 70 ½. Any withdrawals made before the earliest retirement age of 59 1/2 require the plan holders to pay federal income taxes. The Internal Revenue Service also assesses a 10 percent penalty for unqualified, early withdrawals, cites Zacks. Advantages of a 401a savings plan include mandatory employer contributions and accumulating tax-deferred