401(k) Plans in Retirement Planning
You receive "free" money if your contributions are matched by your employer (subject to your plan's vesting schedule)
You decide how much to save (within federal limits) and how to invest your 401(k) money
Your regular 401(k) contributions are made with pre-tax dollars
Earnings accrue tax deferred until you start making withdrawals, usually after retirement
Your Roth 401(k) contributions (if your plan allows them) are made with after-tax dollars; there's no up-front tax benefit, but distributions of your contributions are tax free and, if you satisfy a five-year waiting period, distributions of earnings after age 59½ or upon your disability or death, are also tax free.
You may qualify for a partial income tax credit
Plan loans may be available to you
Hardship withdrawals may be available to you, though income tax and perhaps an early withdrawal penalty will apply
Your employer may provide full-service investment management
Savings in a 401(k) are generally exempt from creditor claims in bankruptcy (but not from IRS claims)
Bear in mind ...
401(k)s do not promise future benefits; if your plan investments perform badly, you could suffer a financial loss
If you withdraw taxable funds prior to age 59½ you may have to pay a 10% early withdrawal penalty (in addition to ordinary income tax), unless an exception applies
The IRS limits the amount of money you can contribute to your 401(k)
Unless the plan is a SIMPLE 401(k) plan, a safe harbor 401(k) plan, or the plan contains a qualified automatic contribution arrangement (QACA), you may have to work for your employer up to six years to fully own employer matching contributions