A 401k is a plan used to save for retirement. They are almost always maintained by one’s employer. Basically, upon your employment, you agree that a certain percentage of your income is placed into this account, and many times, your employer matches a certain part of that percentage. For example, every dollar you spend they may put in fifty cents. Your investment advisor montana can help you to learn some things about 401k’s, but here are some basics.
Are there different types of 401k’s? Yes. There are two types of 401(k)’s, the traditional and nontraditional options.
– Traditional (non-Roth) 401k: This is also referred to as the “pre-tax” option. What happens is that you contribute funds into this 401k before they are taxed. So, the deduction occurs, and then whatever is left is what is actually taxed. This plan then taxes you upon retirement and your acceptance of funds.
– Roth 401k: This is referred to as the “post-tax” option. The funds that you contribute are now included in your taxable income, but the advantage here is that you are not taxed on these funds after you begin removing funds upon retirement (as long as you have had the account for at least 5 years).
Only some employers offer both of these options, so talk to your employer to learn more.
What are the advantages of having a 401(k)? Both employers and employees benefit from using a 401k instead of something like a required pension plan. For example, in a required pension, the employer must match funds. Then, you lose that money when you switch companies, or it just gets given to you in a check for you to deposit in your bank account. Employers don’t have to deal with paying transfer costs and fees; all of that is in the mix already with a 401(k)