Business Cash Advance & Business Financing Alternatives 

Making Sense of Your 401(k) Options

More employees plan to augment their social security retirement income and take greater control of their personal money matters with their retirement investment strategy. Reviewing the benefits of the various 401(k) and IRA  programs and maximize their potential investment returns by starting their investments earlier in life.

Many companies offer a 401(k) retirement program that allows employees to place a portion of their pre-tax income into an investment plan from which they can start withdrawing funds six months before their 60th birthday. The major benefit of a 401(k) is that employers put a matching amount funds into your 401(k). The 401(k) has a greater allowance for savings ($15,000 a year versus the Roth’s $4000).

The Roth 401(k) is a retirement fund that is a hybrid of a traditional 401(k) and a Roth IRA. Like a 401(k), contributions are made with payroll deductions and withdrawals can begin at age 59 and a half. Similar to Roth IRAs, the payroll deductions are part of your taxable income and retirement withdrawals are tax and penalty free (if the account was set up before you turned 54 and a half). Differing from the traditional 401(k), the Roth 401(k) does not receive employer contributions.

The Roth 401(k) can be rolled over into a Roth IRA upon your retirement and no penalties or taxes are assessed. In a similar manner, a traditional 401(k) can be rolled into a traditional IRA, but taxes would need to be paid on it if rolling into a Roth IRA.

Why plan for when you pay your taxes on your current income? Many employees have families and mortgages and enjoy their attendant deductions. By retirement age, your mortgage may be paid off and your children are no longer dependents, which would mean that your tax bracket may be higher. A Roth 401(k) allows you to take advantage of paying your taxes while you are in the lower tax rate. The longer you are invested in a Roth 401(k), the greater the benefit that will be derived from the tax bracket shift.

The overall benefit of the two programs is that you can have your cake and eat it too. If your budget allows, you can invest a portion of your income in a 401(k) fund to take advantage of matching funds and also put a portion of your income into the Roth retirement investment account to take advantage of your current tax bracket.

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