Free Finance Essay Sample - Retirement Savings Plan
This article discussed 401 (k) retirement savings plan in which the employee and the employer jointly pay a certain amount each month to an individual retirement account (IRA) of the employee. An employee may deduct from the salary to a personal retirement account up to $15,500, but not more than 100% of the salary (or $ 46,000). The employer also contributes a monthly basis in this regard as a certain percentage of employee contributions, but not more than 3% of the salary.
Vesting is common practice. According to 401 (k), an employee controls the investment process. 401 (k) money may be invested in certain mutual funds, working with the company, as well as stocks, bonds, and just be kept on the accounts, while an employee choose any sort of strategy - from conservative to aggressive. Normally the employer allows its employees to buy its own shares with the money. Moreover, if the employee does not show initiative in managing their account, the employer can invest a certain percentage of its money from 401 (k) in its own shares "by default". In fairness it should be noted that 401 (k) plan is not cheap for the employer and is used mainly in large corporations, such as General Electric. Shares of such companies are liquid enough. Thus, employer is a decision-maker and is responsible for the usage of his funds.
The tendency shows that the structure of investment portfolio tends to become more conservative as a person reaches retirement. This flexibility allows employee to earn a lot, if he or she is ready to undertake certain risks. If an employee is financially educated person, then he or she is able to manage his or her portfolio wisely and earn enough money as interest to cover all the expenditures after retirement. Otherwise, anyone can delegate the responsibility to mutual funds, which are by their nature conservative entities. Financially speaking, 401 (k) is better than an ordinary bank deposit in terms of tools it provides, and schemes it uses.
Money deposited to the personal account in accordance with the Roth IRA, is taxed at the input to the system and is not subject to taxation upon withdrawal, provided there are no penalties for early withdrawal. The scheme with Traditional IRA involves penalties for early withdrawals before retirement and taxation upon withdrawal. Income taxes aversion in the case of traditional IRA gives an employee extra funds for investments, as they will be taxed only upon withdrawal. The traditional IRA has strict withdrawal rules: no funds may be withdrawn before the age of 59, otherwise a penalty of 10% would be imposed on top of the usual tax bill.
401 (k) is a just and efficient tool for saving your money and investing them without taxation (in traditional plan). If your company goes bankrupt, your IRA would probably bailed out by government, so there is nothing to worry about if your firm is on shaky ground. Such retirement plan involves funds of both employee and the employer, strengthening their mutual relations. Employer has the guarantee of his employees’ loyalty, due to the vesting. In return, an employee gets 3% of his salary deposited with his IRA, which is the motive to continue working for the firm. Substantially, 401 (k) proved to be the most efficient American pension plan so far.