Earning income is terrific, but saving for a well-funded retirement is just as important. Retirement planning is easier to do when you have a job that offers a 401(k) plan that lets you put a portion of your paycheck into your retirement account. Your employer might even give you a matching or partially matching contribution to your 401(k) retirement account. The account can accrue interest and give you investment options to make it grow even faster. Let’s discuss some different types of 401(k) retirement accounts and how they work.
Roth 401(k) Retirement Account
An individual retirement account (IRA) can be a great way to diversify your retirement account, such as with a Roth IRA or a simplified employee pension plan (SEP) IRA. According to our internal resources, job providers can contribute up to 25% of an employee’s pay to a SEP IRA. A SEP IRA and a Roth IRA are different types of retirement planning tools than a Roth 401(k). A Roth 401(k) enables you to place a percentage of your earnings into the retirement account after federal and state income taxes are paid. The proceeds aren’t taxed when it’s time to withdraw some or all of the funds, which makes it incredibly useful for retirement planning.
Traditional 401(k) Retirement Account
A traditional 401(k) lets an employee place contributions from their paychecks before the earnings are taxed and use those contributions to invest. You can place up to a predetermined amount, which can change annually based on inflation and other economic factors. Because the contributions are made before taxes are removed from your earnings, any money that you collect from a traditional 401(k) retirement account is subject to federal or state income taxes. Some states might not tax the retirement income, but the federal government will. So you might pay more in income taxes.
Contribution Limits for 401(k) Plans
Both types of 401(k) retirement accounts are defined contribution plans. You and your employer can contribute up to the limits set by the IRS every year, which puts the onus on you to contribute to it to get matching funds. Most employers give a small amount, such as 4%, and match some contributions that you make. A 401(k) is an alternative to a traditional pension plan.
If you’re in need of expert financial services, South Star Wealth Management can offer you the support you need. Contact us today to learn more about 401(k) retirement accounts and other retirement planning options that could help fund your retirement years. We look forward to assisting you!