The 401 (K) account is one of the chief retirement accounts in the United States. By having the account, one can save funds for retirement. One can also defer taxes on the saved money and revenues till the time of withdrawal. It is up to the employee to decide the amount of his or her earnings to be directly paid or deferred to the 401 (K) account. There are also some companies which offer employees to buy stocks under the 401 (K) plans.
Some of the assets that are covered in the 401 (K)
retirement plans enjoy tax benefits. The after tax contributions are treated as after tax basis and can be withdrawn without any tax liabilities. As 401 (K) account is a form of employee benefit, it must be sponsored by the employer. In most cases, private companies offer the 401 (K) benefits. A self employed person can also open a 401 (K) plan.
The 401 (K) account is also a type of defined plan of contribution. It is a type of salary reduction plan where a portion of the employee earnings need to be contributed to the plan. The taxable salaries of the workers are reduced by the contributions and the earnings are tax deferred till the time the employee withdraws money during retirement.
After an employee leaves the job, his or her 401 (K) account stays active all over his or her life. After one reaches the age of 70½, the accounts need to be drawn out within the first of April every year. If the employee wants, he or she can change the account to an Individual Retirement Account or IRA account. In other cases, if a person again joins a new job which also offers a 401 (K) plan, he or she can change it into a new 401 (k) account.
Some limitations are put on the withdrawals of the 401 (K) accounts when a person is still in service and is lesser than 59½ years of age. If any withdrawal is made, an excise tax which equals to 10 % of the amount distributed is imposed.
Roth 401 (k) account
The Roth 401 (K) account ranks among the well known retirement savings plan in the US. The plan has been passed by the United States Congress under the Internal Revenue Code. One of the main aspects of the retirement savings plan is that it is a unique blend of various features of the
traditional 401(k) and
Roth IRA plans. This offers retirees with better benefits to make them financially stable in the long run.
The main benefits of the
Roth 401 (K) plan is that it combines the features of both the traditional IRA and the Roth IRA plans. Those who are covered under the Roth 401(k) account can decide to contribute money on a post-tax elective deferral basis. The combined elective deferrals of an employee can be more than $16,500 for a tax year if the employee is under the age of 50. If you are over the age of 50, you can contribute an extra amount of $5,500 to your account.
Those who are covered under the Roth 401 (K) plan are allowed to match the contributions to the particular Roth accounts. However, the matching funds need to be made on a pre-tax basis. The main difference between Roth 401(k) account and a traditional 401(k) account is the Roth accounts are funded with after after-tax dollars, unlike the traditional 401(k) account which is funded with pre-tax dollars. After-tax dollars are the ones which consist of funds for which taxes are paid in the current year, while pre tax dollars do not consist of the represent federal taxable income of the current year.
Those who opt for the Roth IRA are the ones who will be most advantageous by the Roth 401(k) accounts. Another advantage of Roth 401(k) plan is that it offers tax free distribution and is not hindered by the limitations of the income. Unlike the normal Roth 401(k) which is limited to $5,000, the Roth 401 (k) contributions can have contributions up to $16,500. However, these are applicable if no other elective deferrals are taken for the tax year.
By getting the Roth 401(k) account, you can enjoy good benefits in the long run.
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