Sep Ira

Is A 401K Retirement Plan Right For You?

As more companies back away from the traditional retirement plan of the past, more people are looking at the benefits of 401K retirement plans. Unlike traditional plans, a sharing between employer and employee makes the plan more attractive. Traditional plans had no provisions for increasing payments going into the plan since employers usually made all of the contributions.

401K retirement plans began slowly, following the path of some companies who offered Profit Sharing plans. The problem with profit sharing plans was that if there were no profits for the period, the employer was not obligated to make any contributions on behalf of its employees. It also had very little federal regulation, so if the company chose to move funds from profit sharing accounts into the general fund, it was unlikely that an employee could do anything about it. On the other hand, 401K retirement plans are regulated by the federal government, and have a series of rules and regulations including reasons that a participant may withdraw funds prior to retirement age.

One of the earliest and best known pre-401K retirement plans is that of the Savings and Investment Plan (SIP) introduced by the DuPont Company. It was possibly the earliest version of a 401K retirement plan and was heavily regulated by the government regarding contributions and withdrawals. For instance, withdrawals could only be made under certain "emergency provisions" such as medical expenses, college expenses, potential loss of your home (eviction or foreclosure) and similar circumstances. Many long-term employees still refer to the plan as the SIP even though they have since adopted the 401K phrase to its name.

Is there an advantage to a 401K retirement plan over a traditional retirement plan? That depends how you look at it in terms of life span. If you are relying solely on a 401K retirement plan combined with social security, a traditional plan may appear more attractive. Traditional plans have a set monthly income while you decide how much you want to draw against your 401K once you retire. On the long end of the scope, though, you have control over the amount of money coming into your household once you retire.

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