As we grow older, we start to think more and more about our future, our house, and retirement. But the people who started to save money as early as possible have the best chance to live better after retirement.
That’s why 401(k) exists. As a program that was created by the federal government for incentivizing people, it aims to help them save for retirement. 401(k) is a retirement savings account that many employers offer to their employees. Many employees take a certain percentage of their paychecks, typically 2-6%, into 401(k) for retirement.
Two Types Of 401(k)
Typically, there are two types of 401(k) that workers can choose: traditional 401(k) and Roth 401(k). The main differences between these two are how they are being taxed.
Traditional 401(K) is a pretax saving account, which means that our money would be taxed at the time we are taking it out. Our money actually becomes less than what it seems in the saving account.
Roth 401(k) is a post-tax saving account. In other words, your money has already been taxed before going into the savings account.
How To Contribute To A 401(k)
Now, you may ask how do we contribute to a 401(k) plan. Employers often offer specific investment for employees, like stocks, bonds, and mutual funds, to increase the amount of money you put in. They may also buy guaranteed investment contracts (GICs) issued by insurance companies and sometimes the employer's own stock.
Although this retirement saving account sounds so appealing, there is a limitation on the amount of money that employees and employers can put in. In 2019, the basic limits on employee contributions are $19,000 per year for workers under age 50 and $25,000 for those 50 and up (including the $6,000 catch-up contribution). Researchers have predicted that in 2020, the basic contribution for under age 50 is going to rise to $19,500, and $57,000—$63,500 for those 50 and older.
When To Access Your 401(k)
Since 401(k) is intended for retirement, taking money out from it before the age of 59.5 will result in a penalty with an additional 10% tax increase on top of any other tax that they owned for both traditional 401(k) and Roth 401(k).
After all, employers are doing so as a benefit for employees. By saving thousands of dollars every year, most employees who has a 401(k) would result in tons of money to live a good life after retirement.
Written and Researched by Jessica Guo