What Are Some Benefits of a 401k?


Quick Answer

One of the biggest benefits of having a 401(k) is that owners contribute to them with money they earn before taxes are taken out, states CNN Money. Another 401(k) benefit is that most employers match a portion or even all of a contribution, states Practical Money Skills for Life.

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Full Answer

People who pay into a 401(k) account do not have to pay state or federal taxes until they reach retirement age, states Practical Money Skills for Life. This is beneficial because the taxable rate of most people at retirement age is less than it is when they're employed. With a Roth 401(k), withdrawals are not taxed if the account holder has the account for five years and is 59.5 or older, is disabled or dies.

Another benefit of a 401(k) is the freedom to move the money around. If an employee leaves a job, he can put the money into a mutual fund or put it into a new employer's plan, states CNN Money. He can also choose to cash out or leave it with the former employer, although these options are not advisable.

Employers who start 401(k) plans reap the benefits of setting up eligibility requirements as soon as the plan starts, states 401KHelpCenter.com. An employer also gets to choose what employees are eligible for the plan, such as employees who have been with the company for a certain number of years or union members. Employers can also receive tax benefits for starting 401(k) plans.

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