Nowadays, the 401(k) retirement savings plan is still unknown to many workers across the States. Also, there are some of you who are new to the States. Perhaps, you have just started to think about a retirement savings plan. Whatever the reason might be, let’s have a close look at it. Many American employers usually offer savings plans to their employees. This 401(k) savings plan is one of the most widely spread.
401(k) has taken its name from a Code that the Internal Revenue Service had. Many Americans decide to choose it because of its advantages. It is advantageous regarding taxes since it can help you save money on them. If your employer opts for this plan, he or she will accept paying some money for it. So, every single month, with every paycheck, the employer will put some money into your account. Therefore, this investment account will grow over the years.
As you start working, it is your employer’s responsibility to provide you with a 401(k) savings plan for your retirement. So as soon as you begin working you can talk to him to see what possibilities he or she may offer. It is important that you check the amount that your employer is paying. The percentage might be really low, but it could be increased every year up to a certain amount. You also have the right to adjust the amount you put in, and your employer could match it up to 50% of your amount.
What is the difference between Traditional 401(k) and Roth 401(k) retirement plans?
Thanks to the US Congress, this savings plan was set up. They thought it was the best way for Americans to save money for their retirement years. There are two main types of 401(k) savings plans. The Traditional 401(k) as well as the Roth 401(k). The Traditional method implies your employer contributes to it and this amount is taken from your gross income. This involves income taxes have not been taken yet.
This means, that with all the contributions to the 401(k) plan you can get tax deductions for that year. The employee does not pay any taxes when he adds money to your savings. When your investment has benefits, taxes are not paid either. Nonetheless, when you withdraw money from your 401(k) plan, you will have to pay taxes.
If Traditional 401(k) contributions came before income taxes had been reduced, Roth 401(k) contributions come after the taxes have been taken from the payroll. This means that when the tax return comes, you cannot get any tax deduction. Besides, no extra taxes are paid if you withdraw your money when you retire. So, it is up to you what you prefer and what you think is best.