Co. retirement plans have few drawbacks

Q. Dear Rick: Are there any drawbacks to investing in a company retirement plan? And, what happens to the money after age 59 1⁄2?

— Ellen from Haverhill

A. Ellen: Since money invested in a company-offered retirement plan is usually tax deductible, grows tax deferred, enjoys the major benefit of compounding interest, and is often matched in part by your company, there are very few drawbacks to such investments. However, I can note two.

The main drawback is that some people will invest in retirement plans when they really can’t afford to. As a result, they’re left without an emergency fund — which is the first savings priority you should have. To make matters worse, in many cases, they borrow against very high interest credit cards to make up for their monthly shortfall. The other main drawback is you usually can’t take the money out of a company retirement plan before age 59 1⁄ without 2 paying taxes on it and a 10 percent penalty at the time of withdrawal.

As for what happens to money invested in a retirement plan after age 59 1⁄ — at 2 that point, you can withdraw the money you’ve invested without a penalty, but you will have to pay tax on the money withdrawn. The reason for this is because you didn’t pay tax on the money when you invested it into the retirement, nor did you pay tax on the growth that money enjoyed while it was invested in the retirement plan.

However, the rate of tax you’ll pay on the money withdrawn at that point will be lower than the tax rate you would have paid when you originally earned it, since most people find themselves in a lower tax bracket in their post-59 1⁄ retirement 2 years.

Do note that you don’t have to withdraw money from your retirement plans at age 59 1⁄2. In fact, if you don’t need to, it’s better not to. Money left in your retirement plans after 59 1⁄ 2 will continue to grow taxdeferred. Although by April 1 of the year following the year in which you turn 70 1⁄ 2 — and each year thereafter — you do have to start withdrawing a portion of the money you’ve invested in your retirement plans.

The amount you’re required to withdraw is governed by formulas set forth by IRS.