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 give you the ultimate 401-k guide.
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 or get covered fund is to save for the time after retirement.