Are there any disadvantages of 401 k plans? There could be.
It depends on the investment opportunities offered by the account provider and at what age you plan to retire.
If the plan is a standard one, rather than a Roth-401k, there could be a disadvantage, too.
Let's take a look at your options.
Roth-401ks have only been available since 2006.
Roth IRAs have been around since 1997.
Traditional IRAs were written into the tax code in 1986.
Standard 401k plans were actually an off-shoot of a tax law that had nothing to do with retirement plans.
Section 401 (k) of the Internal Revenue Code states that employees are not required to pay income taxes on what is referred to as "deferred" compensation.
That is why the company that you work for can make a contribution, in your name, into your 401-k retirement plan, without increasing your taxable income for the year.
Section 401 (k) was added to the Code in 1978 and went into effect in January of 1980.
Of all of the plans, it has been around the longest, nearly completely taking the place of company sponsored pension plans.
You see, there are "no" disadvantages of 401 k plans, as compared to old fashioned pension plans, at least from the company's perspective.
Since, you'll probably never have the option of choosing a standard pension plan, there's no reason to look at the advantage/disadvantage of one of those plans.
But, you could be offered the option of a Roth-401k, if the company has amended the plan to include that option.
Most people feel that the Roth account is a better option, but not everyone feels that way.
The biggest advantage of Roth plans is that qualified distributions are never taxed and earnings from investments made within the account are never taxed.
Some people say that the benefit may never be realized, if the account owner dies before retirement.
While that's true, any of us could die before retirement age.
Does that mean that we shouldn't save for retirement? If you are going to say that dying young is one of the disadvantages of 401 k Roth plans, then you would have to say that you may as well spend all of your money, today.
I like this saying: live in the moment, but plan for the future.
If you don't, you could end up a burden to your children or society.
No one wants that.
There are no other "real" disadvantages of 401 k Roth plans.
There are some perceived draw-backs, in that contributions to the Roth plans are taxed as regular income.
Contributions to the standard plans reduce your income for the year, thus "possibly" lowering your taxes.
The main thing to be sure of, regardless of what retirement plan you choose, is that the investments made from within the account are fully diversified, not restricted to stocks, alone.
Some investment types, such as real estate, have higher earning potentials than others.
There are disadvantages of 401 k plans that are not fully diversified.
But, that's the subject of another article.