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A 401(k) plan is clearly a better way to save for retirement – if your employer offers it – especially if it will match some percentage of your contribution. Most experts say that if your employer does have a 401(k) and will match your contribution, the best thing you could do is contribute the very maximum amount each payday. The matching money your employer contributes is basically free money and what’s better than free money?
Borrow from yourself
Once you build up a balance in a 401(k) account you can borrow from it. And when you pay back the money yo’re paying it back to yourself, which certainly beats paying it back to a bank or credit union. While you will be required to pay interest on that money, you will be paying interest to yourself, which is even a better deal.
Paying back the loan
If you borrow money from your 401(k) you need to pay it back within five years unless you used the money to buy a residence. In this case, you may have a significantly longer period of time to pay back the loan. If you didn’t use the money to buy a house and don’t pay back the loan within five years, the money will be treated as ordinary income and you will be taxed on it and may have to pay a penalty. If you leave your employer before you pay back the money, you will be required to pay it back within 60 days or again, it will be treated as ordinary income.. There are two other important benefits to borrowing money from a 401(k). The first is that it doesn't require a credit check. After all, you're really not borrowing money. You are tapping your retirement account, which is your own money. And second, the application fees should be very minimal – if there are actually any.
Unfortunately, there are some serious drawbacks to borrowing money from a 401(k) account. The first is that during the timeframe of the loan – whether it's two or five years – the money you've taken out isn’t earning a return. This means you've lost all investment growth on the money. When you do pay it back, it comes out of your paycheck so that a $100 payment would reduce your take-home pay by $100. To make matters worse, you pay back the money with after-tax dollars. Finally, when you do reach retirement and begin withdrawing from your 401(k), you will be required to pay taxes on the money. And after you reach 70 1/2, there is a required minimum distribution (RMD), meaning you will be required to withdraw a certain amount of money every year and pay taxes on it accordingly – whether you want to or not.
In summary, a myRA could help you save for retirement. However it alone won't be enough to assure you of a decent life. If your employer doesn't offer a 401(k) and if you don't have a standard IRA, should sign up for a myRA but then augment it with either a standard IRA or Roth IRA. Otherwise, you may find that like many Americans, you will never be able to really retire but will have to keep working – maybe at least part time – until you die.