401(k) and Alternative Retirement Plans
401(k) and Alternative Retirement Plans
Today is the best day to start planning and saving for the rest of your life. The 401(k) is a wonderful savings plan if offered by your employer because the money goes directly into your retirement account. Not only is the money tax deferred when placed direct into your retirement account, but the interest earned in your retirement account is also tax deferred, which means that you do not pay annual taxes on the growing account value. Changes in the tax law have allowed new types of qualified retirement plans with subtle but important differences.
401k
The 401(k) allows you to avoid paying income tax on the amount that you contribute directly to your retirement plan. Once you retire, the amount that you withdraw from the retirement plan in considered taxable income at the time that you withdraw it from your plan. In essence, you avoid paying tax on the deferred income and interest until you take the money out of your retirement savings plan to use it during your retirement. Some retirement plans have provisions that allow the individual to borrow against the savings reserve under certain circumstances, like paying for a college tuition. The provisions that allow for borrowing against the reserve typically also have interest rates and payment plans to return the funds into the retirement plan. If you take the money out of the plan prematurely, then substantial penalties are applied.
Roth 401k
The new Roth 403(b), also called the Roth 401(k), does not allow you to avoid paying income tax on the amount that you contribute to your retirement plan. However, once you retire, the amount that you withdraw from the retirement plan is not treated as taxable income. The maximum yearly contribution for a Roth 401(k) is $15,000 for individuals under 50 years of age, and $20,000 for individuals 50 years old and older. There are no limits to participation based on individual Adjusted Growth Income.
Roth IRA
The Roth IRA has been around for more than a decade and can be started by any individual. It does not require an employer contribution. However, there are limitations that apply to the Roth IRA. A person may not contribute to a Roth IRA if the personal Adjusted Growth Income (AIG) exceeds $110k per year, or $160k for couples filing jointly. Furthermore, the maximum yearly amount for contribution is $4,000 for individuals under 50 years of age, and $5,000 for individuals 50 years old and older.
Alternatives
In addition to 401(k), Roth 401(k) and Roth IRA, there are many other alternatives for building a nest egg for a comfortable retirement. Many employers offer retirement investment plans and may even provide a matching contribution. If your employer matches your contribution, this is an easy way to earn extra income that goes directly into your retirement savings. If you can afford this deduction from your paycheck, find out the maximum matching contribution from your employer and treat that extra percent in your savings as if it were a deferred bonus.
If your employer does not offer a retirement plan or matching contributions, or if you need to rollover your retirement plan due to a change in jobs, there are also alternatives available from banking institutions and life insurance carriers. For example, some packages offer to match S