What is a 401(k) & What is a Roth 401(k)?
401(k) The Playlist Here.
It is important to begin Investing, but prior to investing always do the following;
#1 Pay Off High-Interest Debt First (Anything Over 5%) School Loans, Credit Cards, Etc.
#2 Create Your Rainy Day Fund at least 3-6 Months of living expenses. This will cover the essentials (Shelter, Food/Water, Utilities).
What is a Pre-Tax 401(k)or Roth 401(k):
What Is a 401(k):
Pre-Tax 401(k)was intended to allow taxpayers a break on taxes on deferred income, it was enacted into law in 1979 by the Internal Revenue Code.
Contributions are made on a pretax, meaning the employer takes money out of a paycheck and transfers it in the employee retirement plan before withholding taxes.
When the employee begins to take distributions after 59 1/2, he/she will pay income tax on those distributions. The income tax will be based on the employee’s tax bracket at the time of the distribution. If the employee is not yet 59 1/2 he/she may also be subject to a 10% early distribution penalty unless the exceptions below apply.
Main Question To Ask Yourself: What Income Tax Will You Be In The Future or Foresee Taxes Increasing In The Future?
What is a Roth 401(k):
Roth 401(k)was enacted in 1997, it was introduced with the passage of the Taxpayer Relief Act.
Contributions are made after an employer withholds taxes, because the employee already paid taxes, he/she will not owe taxes on distributions normally.
When the employee begins to take distributions after 59 1/2 and those contributions have been in the account for at least five years, he/she will not pay income tax on the distributions. If the employee is not yet 59 1/2 he/she may also be subject to a 10% early distribution penalty unless the exceptions below apply.
Company Matches, If the employee receives a company match on a Roth contribution, the company match is a pre-tax contribution. This means the pre-tax contribution will go into the pre-tax 401(k) account. The capital gains, dividends and interest will be subject to regular income tax when distributions are drawn at retirement.
Main Question To Ask Yourself: Do You Believe You’ll Be In A Higher Tax Bracket In The Future or Universal Health Care Would Cause Taxes To Increase To Say 50%?
401(k)& Roth 401(k)Facts:
- The most popular retirement plan is the 401(k).
- The 401(k) is setup by employers in small to large businesses.
- The 401(k) and Roth 401(k) options would be available under the same plan and could split 100% between the two.
- 401(k) & Roth 401(k) Contribution Limit Remains at $18,000 for 2017.
- Contributors who are at least age 50 by end of year can contribute an additional $6,000 for 2017.
- Distributions must begin no later than age 70½, unless still working and not a 5% owner.
- Typically, a 401(k) & Roth 401(k) offer five or more mutual funds that invest in various sectors of the financial markets.
- Some 401(k) plans also offer shares of your employer’s stock.
- 401(k) usually have a range of 5-20 limited funds that are “Professionally Managed” which means they come with high expense ratios.
- 14% of 401(k) funds DO NOT BEAT THE MARKET on any given year and 0% can beat the market over the long term.
- 401(k) often come a number of fee’s: Annuals Fee’s, Legal Fee’s, Transaction Fee’s, Bookkeeping/Maintenance Fee’s and more.
- 401(k) can convert to an IRA or Roth IRA, but a Roth 401(k) can only be rolled over to a Roth IRA.
- Non Principal Withdrawals – You may be able to avoid penalties, but not taxes on 401(k) if you meet one of the following:
- Qualified Education Expenses
- Death or 100% Disability.
- Un-reimbursed medical expenses or health insurance if you’re unemployed.
- Other (Please See The IRS Website for complete list)
401(k)Is It Worth It?
Ask Yourself These Questions:
- Does company offer a “Match”? 2-5% is normal matching programs.
- What is your current tax bracket? (Could Contributing to 401(k)lower into a lower tiered Tax Bracket?)
- How long do you plan on staying with company? Remember to look at the companies vesting schedule.
- Can you change it (Talk to HR to see if they can pick a plan that offers low fee index funds)
Have you considered these alternatives:
- Starting Your Own Business – Save 5%-10% Per Check For Your Business Start Up.
- Specialized Accounts – Individual Retirement Account (IRA) or Roth IRA.
- Farm Land – Buy Land That Will Be Needed Future & Wait/Build or Sell Later.
- Rental Property – Buy Rental Inside Your LCC, Take Advantage of Tax Deductions.
Here is a link the IRA 401(k), Roth 401(k)& Roth IRA quick summarized information:
I Hope You Enjoyed This Article.
I want to know what’s on your mind and get ideas on how you are planning on investing in your future.
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