Advantages and disadvantages of retirement plan?

Answer 1

Depends on what type of retirement plan, for specifics. But, "retirement plans" are usually covered by two major laws (ERISA and PPA) which grant certain tax advantages and protections to the plan's participants and beneficiaries. Most retirement plans are tax-deferred vehicles. That is, the money that is set aside in them, for retirement, grows without accruing tax liabilities. (Or, in English that means that while the money is in the plan, the money doesn't owe taxes... although typically when a participant withdraws the money in retirement it is considered taxable income on the participant's form-1040.) This is an advantage because the money grows faster over time without paying annual taxes than with. Another key thing about retirement plans, is that the assets are protected from bankruptcy. An employer's plan, is not an asset of the employer, but an independent trust. Also, while an employees money may be in the plan, it's not a direct asset of the participant. So, for example, if a company were sponsoring a 401k plan, and it goes bankrupt, the law provides that the assets are held specifically for the participants and beneficiaries. Similarly, if a participant in a plan files for personal bankruptcy, their retirement plan assets aren't subject to his/her creditors either. There certainly are other advantages, but you'd need to ask a more specific question for me to elaborate. There are a few disadvantages to a retirement plan as well. One that I hear occassionally is the limited availability of the money. As I said, most plans are governed by both law, and the specifics of the plan, found in a Plan Document. And, one of the general rules of law, is that that tax-advantages mentioned above, means that in general, plans make it difficult for a participant to take their money from the plan prior to retirement age (often "retirement age is considered to be 59 1/2 yrs old.) Usually, to take your money prior to retirement age, you would pay a 10% penalty in addition to counting the withdrawal as income. And, depending on your plan, there may be restrictions on why and how much you can take. More recently, some have commented that retirement plans also have hidden expenses and fees. I think some of this is press hype, since the fees are required by law to be disclosed if you ask... but, retirement plans may have some "different" (not "extra") fees associated with it. Again, the government requires that most plans have an annual audit, be held in a retirement trust, and do "testing" to be sure the plan doesn't discriminate in favor of some over others. These rules, and the accounting, recordkeeping, and other services to administer the plan may result in fees being charges to participants. (The law also requires the plan's trustees and sponsors to ensure that these fees are reasonable.) So, to be sure, a retirement plan isn't "free". But, when you compare these fees with other ways employees have to save -- bank funds, mutual funds at brokerage firms, or insurance policies -- typically the plan is cheaper since it gets a "group" discount because of the plan's size, as opposed to individual "retail" fees charged to a small individual investor. hope that helps