An employer-sponsored 401(k) plan and a regular savings account both offer ways to save money. However, the similarities end there. 401(k) plans offer tax-deferred savings for retirement, while savings accounts are a taxable vehicle to save money you can use any time. Both accounts have advantages and disadvantages.
If you need money right away, you can take money from your 401(k) plan, but you will pay penalties and taxes on the money. With a savings account, you have access to your money anytime without penalties. If you have a 401(k) plan and are still working, you can take out a loan for up to a maximum of $50,000 or 50 percent of the balance, whichever is smaller. The money is paid back through payroll deduction over a period of five years or less.
Money added to a savings account is already taxed, whereas 401(k) fund contributions are not taxed until the money is withdrawn. During your retirement, you may or may not need to pay tax on the 401(k) funds received, but this will depend on your tax liability. The only tax paid on a savings account is on the interest earnings.
You can add money to both the 401(k) and savings account, but with the 401(K) plan, the money is deducted from your employee paycheck, and there are limits on how much you can contribute annually. A savings account allows you to add money anytime with no restrictions on the amount or where it comes from. With the 401(K) plan, employers can elect to contribute a percentage of money to your account, which you have more money to invest.
Risk and Rewards
Savings accounts held in financial institutions are insured for up $250,000 per account holder and will collect interest while the money remains in the savings account. The 401(k) funds are at risk at all times because the plan makes money when the market is good but can lose money when the market falls. While your money is safer in a savings account, your potential gains are higher with a 401(k) account.