Around the age of 65, people across the country begin to retire - how do they fund their lives after retirement? Through 401k plans. A 401k plan is a retirement fund sponsored by one’s employer through a section of the U.S Internal Revenue Code. It is a defined contribution plan: parts of a worker’s payroll are contributed to the plan and withheld from their total earnings. It is a form of investment.
There are two different types of 401k plans: traditional and Roth. The difference between the two comes down to the payment of taxes.
Roth accounts tend to be more commonly recommended to younger savers. Your contributions here are made with after-tax dollars, in contrast to the pre-tax dollars with the traditional account plan. With the Roth account, at the age of 59 and a half, withdrawals of earnings & contributions are tax-free - given you have held the account for at least five years. Roth is a good choice for young workers who expect to have a high salary bracket by their mid-50s, likewise those in professions with high potential earnings. It has great potential to increase your disposable income. Summatively, all income on this account is tax-free.
Traditional accounts give employees a choice of investment options; however, income taxes do not come into effect until retirement or when these funds are withdrawn.
Many bankers advise to save between 10%-20% of your total income annually in order to maintain a consistent lifestyle post-retirement, however, this does not take into account other investments or assets. To boost your savings, it would be favorable to put as much in. If your employer matches this amount, this could easily turn into 20%-40% of your total income, leading to a more comfortable retirement. It is also important to have an action plan or a solid goal of where you want your money to take you - what do you wish to do after you retire, where do you want this money to go? These are all important questions to ask before sliding the scale on your investment plans.