401k Retirement Plans Compared to Other Options

401k retirement plans are a very popular choice for those that wish to save for retirement. However, you do have several other options when it comes to choosing a retirement plan. Here are the basics of the 401k account and how it compares to other retirement options.

401k Account

This type of account is set up through an employer as a retirement account for their employees. As an employee, you will be able to contribute pretax dollars to this account directly from your paycheck. You can contribute up to $16,500 per year into this type of account. The money that you contribute can be invested into a number of different investments. Your 401k provider will have a list of available investments for you to choose from. You can reallocate your funds into different investments as you choose. The money that you make from these investments is allowed to grow tax-free. Then, when you reach the age of 59 1/2, you can begin withdrawing the money from your account. At that point, you will have to pay regular income taxes on the money that you withdraw. One of the major benefits of this type of account is that your employer will commonly contribute to the account for you. They get a tax deduction for every dollar that they contribute to their employee's accounts. If your employer does contribute, that will basically provide you with free money for your retirement before you ever even start investing.

IRA

Another option that you have in saving for retirement is an IRA. The individual retirement account is a very common type of account that you can get through nearly any financial broker. With this type of account, you can contribute as much as $5000 per year. You will be able to fund this account with pretax dollars as well. Just as with the 401k, your money will be allowed to grow tax-free. One of the big differences with this type of account is that you will have much more control over what you can invest in. IRAs traditionally have many more investments that are available to put your money into. As long as you do not use your money to invest in collectibles, life insurance or personal business deals, you can invest in anything else that you like.

Roth IRA

The Roth IRA is another option that you could consider for a retirement account. This type of account also has a $5000 limit like the traditional IRA. With this type of account, you can also invest in a number of different investments. The main difference with this type of account is in the tax structure. You will fund this type of account with after-tax dollars. You will then be able to use the money to invest in the market. The returns that you make in the market will not be taxed. Then, when you reach the age of 59 1/2, you will be able to withdraw the money without paying any taxes on it. Regardless of how much money you make in the market, it will all be tax-free.

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