The 401k is one of the most widely-used retirement savings accounts. It is established by the employers for their employees to meet their retirement goals. 401k is eligible for tax benefits as it is a qualified plan. As of 2017, under the 401k plan, the maximum pre-tax contribution that an employer or any person can make to their plan is $18,000.
Contribution To 401k
In a 401k plan, you can make contributions from part of your employment earning which can be made before or after payroll taxes. Once the contributions are in your account, the profits made from investing these funds grow on a tax. This means that if you make any sort of pretax contributions from your pay, you will pay taxes on your pay/income until you withdraw them when you end up retiring. This allows to reduce your current taxable income and put off those taxes into your retirement when you are likely be in your lower tax bracket.
Roth 401k Plan
The Roth 401k plan allows you to make after tax contributions. so, you won’t pay tax when you pull the money out after you retire. But, you need to hold the money in the plan for the minimum a number of years before withdrawing it after retirement.
Some employers also match the amount an employee could send into the account or offer other incentives like profit sharing, this is a great way to boost your savings, but the IRS does set limits on how much you can contribute to these plans and also set restrictions on how and when you can withdraw the funds.
Time of maximum benefit
Because of their tax advantages 401k plans can help to grow your retirement savings much faster than saving and investing without them. If you start contributing early and wisely, the 401k plan will help you leverage time and reduce taxes while achieving your retirement goals.
How to handle a 401k while changing jobs
Don’t pull out all the money as yet, though it may be tempting to do so. Instead, put the money in a tax-preferred account. You can leave the money untouched, move the balance to a new employer’s 401k plan or roll it over to an individual retirement plan. Do weigh in all the options before making a final decision. Look for investment options with low costs. Shop thoroughly and take a look at all options available.