- Most people do not maintain significant balances in basic savings accounts for lengthy periods because the accounts pay very little interest. CDs pay more interest than savings, with multi-year CDs paying the most.
401k plan participants must pay a 10 percent early withdrawal penalty if they withdraw funds before they reach age 59 1/2. Additionally, they must hold the funds in the 401k account for 5 years before accessing them. - Most 401k plans enable participants to invest in a variety of mutual funds. Typical fund offerings include foreign stock funds, domestic stock funds, bond funds, real estate funds and money-market mutual funds. Many companies match employee 401k pre-tax contributions that amount to up to 6 percent of their salary.
The Federal Reserve restricts savings account holders to six withdrawals per month. CD customers cannot access funds until the CD term ends without incurring an interest penalty. People must visit the bank in person to make withdrawals from most savings and CD accounts. - 401k accounts contain money not yet subjected to income tax. As of 2010, most employees can invest up to $16,500 in 401k accounts, which reduces their taxable income for the year. Once invested, funds grow tax deferred. Participants do not have to withdraw funds from their 401k until they reach age 70 1/2.
All bank products are eligible for coverage from the Federal Deposit Insurance Corporation. CDs and savings accounts at most credit unions are covered by the National Credit Union Administration, which works similarly to FDIC insurance. - 401k plans do not contain options where participants can invest directly in CDs and savings accounts, but some 401k sub-accounts contain CDs. Most 401k money-market mutual funds contain short-term jumbo CDs that trade on the secondary investment market. The CDs are issued by banks, but when held in mutual funds, the CDs do not enjoy the protection of FDIC coverage. Even aggressive mutual funds hold CDs temporarily because fund managers stow money in CDs between stock trades.
- People can roll 401k funds into traditional Individual Retirement Accounts at banks after they leave a company or retire. Some companies allow in service withdrawals for employees over the age of 59 1/2. Many 401k plans allow people under the age of 59 1/2 to roll money from company matching contributions that they transferred from former employers into IRA accounts. Typically, bank IRA accounts contain CDs or savings accounts. These IRA transfers are not taxable events.
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