7 Often-Overlooked Great Reasons To Use A 401(k) Account

Do you expect a rich uncle to support you when you retire? Yeah, almost no one else does either. In the U.S., 91% of workers feel personally responsible for making sure they'll have enough income in retirement, according to a new survey by Transamerica Center for Retirement Studies and several collaborators. But only 34% of workers feel they are on track to do that.

A 401(k) account is crucial for most workers who want to save enough for retirement, says Colleen Jaconetti, senior investment strategist for Vanguard. Many workers know that, but many still do not contribute enough to their account. You likely know that your contributions reduce your taxable income each year, that investment earnings inside your account grow tax-deferred and that your company probably offers a matching contribution. But if you need additional motivation to kick in more - Katie Taylor, vice president of thought leadership at Fidelity Investments, advises workers to contribute 15% of their income each year - then you should consider additional, often-overlooked but important benefits to using a 401(k) account.

Here are seven of them. Their benefits are compared to IRAs', which are also good savings vehicles even though some features aren't as good as 401(k)s'.

1. Higher contribution caps. You can contribute more to a 401(k) account than to a traditional or Roth IRA. This year's contribution cap to a 401(k) is $18,000 vs. $5,500 for an IRA. If you're age 50 or older, you can kick in as much as $24,000 to a 401(k) or $6,500 to an IRA. "At nearly three times higher than the IRA limit, this is the single most important difference," said Judith Ward, a senior financial planner for T. Rowe Price. "And, remember, for anyone using a diversified portfolio, the amount you contribute will have the most impact on your savings balance - more impact than what you put the money into."
2. Contributions at later age. You can continue to put money into your 401(k) after age 70-1/2 if you are still working. You can save in your employer's 401(k) plan, not in a plan in any former workplace. And your contributions are tax-deductible, meaning that they reduce your taxable income for that year. In contrast, IRAs are much more restrictive. You cannot contribute income to a traditional IRA after reaching age 70-1/2. You can only roll over money from another type of account like a 401(k). In addition, you can keep contributing to a Roth IRA only if your income is below $186,000 if you're a married taxpayer filing jointly or $118,000 if you're single.
3. Ability to delay withdrawals. You can delay withdrawals from a 401(k) until you retire, past age 70-1/2, if you don't own 5% or more of the company you work for. You aren't allowed to postpone payouts from IRAs past 70-1/2, even if you're still working. "This is a huge benefit," Jaconetti said. "It means all of that money in your account can continue to benefit from tax-sheltered growth instead of being depleted."
4. Early-withdrawal penalty loopholes. This is the flip side to the ability to delay the start of withdrawals from a 401(k). If you do need income early, you are allowed to start penalty-free withdrawals sooner from a 401(k) account than from an IRA in many cases. Normally, you get hit with a 10% penalty if you withdraw money before age 59-1/2. But there are some legal loopholes that exempt you from the penalty. A key one applies simply if you've retired or left your job and you are 55 or older. This loophole does not apply to withdrawals from IRAs, although some others do. Remember, you still must pay income tax on a penalty-free early withdrawal.

Here are other lesser-known benefits of 401(k) accounts:

1. Flexibility. You can contribute to a 401(k), Roth IRA and traditional IRA all in the same year, up to their yearly limits, if you follow the applicable rules.
2. Fee disclosure. Your 401(k) has to spell out much more about how much you're paying in annual fees than an IRA does.
3. Protection. Your money is safer from creditors inside a 401(k) than an IRA.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.