Your One Stop Guide to 401-k

Many people are unsure of which retirement plan to enroll themselves into. After retirement, if you haven’t made any savings, your only income would come from social security, which, frankly, is not much to rely on for a comfortable retirement. A 401-k plan is a preferable option for all those looking for a retirement plan, however, many people are intimidated by it as it involves saving the money from your monthly income. In reality, it is a very comfortable and flexible option. So without further ado, let us tell you all you need to know about the 401-k plan.

What is 401-k?

This is a retirement plan which you can control. You can decide how much money you are going to invest each month in the plan. If you start early, your money will grow for a longer period of time and by the time you retire, you will get more.

What are the Benefits of 401-k?

The main benefits you get out of using this retirement plan is that the money that you keep in the plan will not be taxed until you withdraw it. This means that every month, you will be paying taxes on only the money that is left after you have set aside the money in 401-k.

Although the tax will have to be paid once you start withdrawing money from your 401-k after retirement, but by then your monthly income will be lower, and the taxes would therefore be low as well.

In addition to this, you can choose what the bank does with your money, unlike other savings accounts, in which you have no say over what the bank will invest in with your money.

What is a Roth 401-k and How Does IT Differ from 401-k?

A Roth 401-k plan works exactly like a 401-k except for one difference—the amount that you set aside for the retirement fund is taxable. This means that you will be paying the taxes on your entire income, but when it is time to withdraw money after you retire, the money you have set aside in the Roth 401-k will be completely tax free.

Which Choice is better? 401-k or Roth 401-k?

Both choices are good, but there are different factors which would make one seem better than the other. Briefly put:

401-k plan is better when:

  • You salary is high right now.
  • You don’t wish to pay hefty taxes right now.

Roth 401-k plan is better when:

  • Your salary is relatively low right now.
  • You don’t wish to pay taxes on your retirement funds when you retire.

Can I Withdraw Money from 401-k before Retirement?

With tax penalties of up to 10% for each early withdrawal, yes you can. And in the case of emergencies, you can borrow money, but you will have to pay it back.

However, we recommend that you consider the retirement money as un-spendable, since the entire purpose of a retirement fund is to save for the time after retirement.

Get covered

Insurance. Many see it as an unnecessary evil a drain on resources that has no investment value. It is understandable that many have a problem with insurance companies as there are so many horror stories of people paying their premiums only to be let down by their insurance companies as there are so many horror stories of people paying their premiums only to be let down by their insurance provider in their hour of need. It stands to reason that if you pay your premiums, you should be in a position to receive the benefits of your coverage without question, should an incident occur. This isn’t always the case as less reputable insurance companies fail to pay out as a result of them finding loop holes in insurance contracts that penalize their customers, often for some form of negligence–much to their surprise. Those companies that do pay out often find reasons to pay less than originally agreed based on some technicality. For cars… this can take the form of an adjustment due to the vehicles loss in value over time. Alternatively, many don’t realize that modifications to a car, any modification no matter how insignificant, can result in your insurance being invalidated. Dangerous driving resulting in prosecution from the authority can also exempt insurance companies from some liabilities.

With this being said, it’s important to find insurance companies that are known for the level of coverage they provide. Of course, expect to pay more than their less trustworthy counterparts… but what you lose in additional fees, you’re very likely to gain in additional coverage. This point become particularly important if you’re looking to protect your own personal estate from loss. Let’s take car owners for example: Those who have bought a cheap car for a little run-around… you know… something used for the daily commute and/or shopping trips and school runs… may only want very basic/cheap insurance coverage for their vehicle. After all, repair costs and/or the cost of replacing the car is likely to be affordable, should the insurance policy not provide full coverage following an accident. What’s important is that third-party’s are covered… which they should be by law. How about someone who has bought a Ferrari. In this situation, you could argue that most Ferrari owners probably have an abundance of wealth and resources; therefore money isn’t an issue in the event of a crash. However, it would be wise to seek insurance that provides the most comprehensive coverage possible… as it wont be cheap to personally cover loss or damage to such an expensive vehicle.