401k Advantages and Disadvantages

401k plans definitely have big benefits. Out of all of them, the ability to grow your retirement savings and pay deferred taxes is definitely the best reason to open one of these accounts. But it’s certainly not the only reason as you can imagine.

When you compare your 401k to other types of investment accounts, you’ll see how well these benefits stack up. So if you’re looking for the truth about the advantages of a section 401k retirement account, please keep reading to discover the truth.

Advantage #1: The Tax Benefits of a 401k Plan

The major 401k plan advantages is that they provide threefold tax benefits. We already shared with you that making contributions come from pretax dollars. So you do not have to pay taxes on your income before transferring it into your 401k plan. It comes directly from your salary pretax so you get to maximize your earnings on your before tax dollars.

The second excellent tax benefit is since this money is coming out of your paycheck before paying taxes, you actually get to lower your tax bracket as well. They do not count this money as income on your paycheck, so you’ll pay less taxes overall by being in a low tax bracket. It definitely pays to put money away for your retirement in more ways than one.

Third, you have the opportunity to grow your savings with tax-deferred money. Regular investment accounts require you to pay taxes on dividends and net gains every year. But a 401k is a tax-free plan, as long as you do not step outside of the plan. So you can produce on your earnings and you won’t pay taxes until you begin withdrawing money as early as 59 1/2.

Advantage #2: Company Match 401k Plan Benefits

Another awesome benefit of 401k plans is many employers are willing to provide match benefits up to a certain set limit. As an example, let’s say your company is willing to match $.50 to your every $1 invested. And they are willing to match this amount up to $5000 per year.

Related:  What is a 401k Match Program?

So, if you invest $10,000 into your 401k account throughout the year, your company will provide an additional $5000 according to their employee match plan. This is almost like getting free money from your employer and it’s certainly helps boost your 401k contributions tremendously.

Advantage #3: The Benefits of a 401k for Late Savers

Did you begin saving for retirement much later in life? Well, the US government allows late savers to take advantage of annual catch up contributions. So you can add to your 401k plan tremendously at a later stage in life.

As an example, in tax year 2019 you can invest an additional $6000 if you are 50 years of age or older. In tax year 2020, the amount gets bumped up to $6500 on top of the $19,500 already designated for that particular year.

This is a huge advantage for those coming late to the savings party. Do not ignore this additional gift provided to you by the IRS.

Summary of the Advantages of Having a 401k

As you can see, there are many advantages to investing with a 401k plan. There are tremendous tax breaks, late saver benefits, and company match benefits as well. Clearly, this is an excellent way to set up your retirement nest egg, so if your company offers this option you should jump all over it as soon as possible.

What are the Disadvantages of Having a 401k?

401k Cons

Like everything in life, some things have upsides and downsides depending on how you look at it. Take 401k account as an example. For many people, there are plenty of positives to this type of investment account. But on the other side of the coin, some people may find negatives – or cons – about this account as well.

Today we’d like to help you learn about the potential negatives or downside – the cons if you will – of a 401k account. So if you’ve ever wondered about getting involved with your employer plan but had your doubts, this is the information that you’ve been looking for.

As we’ve said, nothing is perfect in life. There are definitely positives as well as negatives to opening up a 401k account with your employer. We’ll share the ones we’ve discovered with you today and you can determine if they are too negative or no big deal based on your personal experiences and life situation.

Con #1 – You’ll Potentially Pay Higher Taxes in Retirement

Many people love 401k accounts because they are the ideal tax shelters. But this only happens if you do not touch the money until it comes time to retire. If you try to touch the money earlier, not only will you have to pay taxes, you also end up paying tax penalties as well.

But as far as retirement is concerned, you could end up paying extra taxes once you begin withdrawing your contributions. This money combined with any other income you might be earning at the time could potentially put you in a higher tax bracket. And obviously being in a higher tax bracket means you’re going to give the IRS more of your taxable 401k income.

For the most part, people tend to earn less once they reach retirement age so this usually isn’t a problem. But it’s definitely something to consider if you plan on working or continuing with your investments much later in life.

Con #2 – You Have To Stick to a Contribution Schedule No Matter What

Timing the market is incredibly difficult to do and most people never even attempt it. But if the market is down you may not want to continue to contribute to your plan. But at the same time, you’ll have to stick to your typical contribution schedule to capitalize on any other bonuses you might receive from your employer like 100% matching, 50% matching, or some other type of bonus.

So even if the market happens to be down, you’ll still need to contribute to your 401k plan to take advantage of this generous offer from your employer. So you may have to keep contributing during tough economic times which can be very scary for many people. So keep that in mind because it might feel like you are contributing to an account that acts like a sinking ship due to the plummeting stock market and other outside forces.

Final Thoughts

As you can see, nothing is perfect in this life and even 401k plans have their disadvantages at times. And we’ve only scratched the surface because other potential negatives include paying higher fees, limited investment choices, and your inability to touch your money until retirement age. Combine all of these disadvantages and a 401k plan might not be the best choice for you and your personal situation.

Tim Schmidt


Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.