3 Little-Known Perks of 401(k)s

Believe it or not, 401(k) plans are more popular than IRAs in the context of retirement savings. The U.S. Census reports that almost 35% of Americans had a 401(k) or a similar workplace plan as of 2020, while only about 18% had an IRA. 

IRAs and 401(k)s are similar, in that both offer tax breaks when saving for retirement and both allow you to invest your money to grow it into a larger sum. IRAs, however, come with much lower contribution limits than 401(k)s. 

If you have a 401(k) plan, you may be aware of some of the perks that come with it. Your employer, for example, might match some of the contributions you make to your 401(k) so you end up with free money for your retirement. But here are a few lesser-known benefits you might end up taking advantage of with a 401(k) plan.

1. You can withdraw your money at 55 in some cases without penalty

Normally, when you have money in an IRA or 401(k), you can't take withdrawals prior to age 59 1/2 unless you're willing to face a 10% penalty on the sum you remove. But there's an exception known as the rule of 55.

If you turn 55 the year you leave your employer (voluntarily or otherwise), you can start taking distributions from that employer's 401(k) without getting slapped with an early withdrawal penalty. There's no such provision that allows you to do the same with an IRA.

2. Your money is protected from creditors

If you become delinquent on an outstanding debt, a creditor may be able to sue you in court. If a judgment is entered against you, that creditor might be able to come after certain assets of yours to get repaid. 

But the Employee Retirement Income Security Act (ERISA) of 1974 protects funds in your 401(k) in that situation. A creditor generally cannot come after your 401(k) even if you clearly owe money. The same can't be said for an IRA, since those accounts don't fall under that same ERISA protection.

3. You can borrow against your balance when you need a loan

There may come a point when you need to borrow money, whether to fix up your car, repair your home, or get through a brief period of unemployment. If you have your savings in an IRA, you won't be able to borrow against your balance. But you might be able to borrow against your 401(k) if your plan rules allow for it. 

This can be beneficial because instead of paying interest to a lender, you're simply repaying yourself. And if you don't have such great credit, qualifying for an outside loan may not be easy. But if you have enough of a 401(k) balance to borrow the sum you need, you may be able to do so with relative ease.

That said, borrowing against a 401(k) can be dangerous, because if you don't repay that loan in time, it will be treated as a full withdrawal. If you're not yet 59 1/2 at the time of that withdrawal, a 10% penalty will generally apply. So if you're going to take out a 401(k) loan, proceed with caution.

Your 401(k) is the sort of thing you may not think about too often. But it pays to read up on 401(k)s so you know what benefits your plan might open the door to.