An employee should understand that they are never too young to start saving for retirement. In fact, experts advise the earlier the better. This is one area where time is on your side. What are the different 401 K’s and how do they work? It is important to know when choosing the right one for your needs.
There are basically three types of 401 K’s. There is a traditional 401 K, a 401 K with employer contributions, and a Roth 401 K. There is a Roth IRA, but it is not considered to be a 401 K so will not be discussed here.
A traditional 401K is a pretaxed retirement savings plan The present yearly contribution amount for employees under age 50 is $16,500. For workers over 50, the yearly contribution amount increases to $22,000 . Most 401 K plans are tailored for larger businesses with over 100 employees, however there are 40 K plans for businesses with less than 100 workers. Some companies do not offer employer match, while others do. Some match your contribution amount dollar for dollar while others match up to a certain amount. You will need to check with your employer to see if they provide this option. Some 401 K’s offer a choice of where investments go. others direct the investments for their employees. All plans offer a reduction in taxes at the end of the year. Some plans offer the possibility of deducting an amount out of your 401 K while others, do not allow any money to be borrowed. You can withdraw all or part of your money out of your 401 K starting at age 59 and a half. However, you will have to pay regular income tax on the withdrawal plus a 10% penalty tax for withdrawing before full retirement age . A 401 K is only available to employees working for a company or business. Contributions are also needed on a periodic basis in order to keep the 401 K in force.
On the other hand, a self employed person can opt for a Roth 401 K. Also,some employers are encouraging their employees to chose the Roth 401 K option. There are a few major differences in a Roth 401 K. The first is the contribution amount. A person opting for a Roth401 K can contribute up to $49,00) per year. The contributed money is put into the account post tax. Also, if contributions stop, the Roth will still be in existence. The Roth 401 K can also be passed onto future generations. Also, you can being to withdraw the money at age 59 and a half tax free, with no penalty.
Deciding which retirement 401 K is right for you is a big decision. Making the right choice, can be the difference in the amount of money you have to retire on.