Saving for retirement may seem like a fairly straightforward system: money gets put away each month or year to be used later when it comes time to retire. This is not the only benefit, by a long shot. Saving for retirement provides extra benefits that can take effect long before retiring. Saving for retirement provides a large number of tax options, and retirement accounts can be accessed in a number of ways to provide useful emergency funding.
All of the contributions made to the company 401(K) retirement plan is taken out before taxes. This means that more money gets deposited to grow, and then the tax is taken off both contributions and interest upon withdrawal. Despite the bigger hit on the tail end, the contributions going in before tax means that there is exponentially more growth. The contributions going in before tax also means that the taxes for that year are lighter than they otherwise would be without setting aside a percentage for retirement.
Hardships and loans
Employer 401(K) accounts have strict rules on when money can be withdrawn from the account. Meant to be used as a last resort, taking out a hardship or a loan allows you to access the money before meeting the age or employment requirements set by the law or the group. Taking a hardship requires proof of hardship, but allows withdrawal of the money without repayment. A hardship is, however, subject to the 10 percent early withdrawal tax. A loan, unlike a hardship, is not taxed and has a wider variety of reasons why it can be taken out. As the loan is repaid, the principal is deposited back into the account and can begin to accumulate interest again.
IRA benefits are mainly the option to withdraw money at any time though there is the 10 percent fine for any withdrawals made before you turn 59 1/2. The larger benefit is held by the Roth IRA, which has additional benefits beyond a normal IRA. All contributions are post tax, and the interest can be withdrawn without tax after the age of 70 1/2.
One of the largest benefits of funding IRAs is that the laws regarding withdrawal have nothing to do with employment, and distributions can be taken out while working as needed. After the age of 70, regardless of employment, many accounts begin enforcing the Required Minimum Distribution, an amount you have to take out each year, with fines enforced if the distribution is not taken on time.
Saving for retirement is more than just an investment for the distant future; retirement accounts provide quite a few unexpected benefits that can be used before it's time to retire. Retirement savings provide tax benefits, and can act as a last resort emergency fund, as well as giving loan opportunities. Even within the intended purpose of retiring, an early retirement can be taken if one has enough well-funded retirement accounts. The list isn't endless, but the depth of options that retirement accounts provide is surprising.