401K's are funded with pretax dollars, which means that the money is taken out of your paycheck before taxes are deducted. The benefit is that it lowers your taxable income for the year but eventually when you retire you will have to pay taxes on that money. Also if you make withdrawals before you reach the age of 59 1/2, typically you will have to pay a 10% early withdrawal penalty on top of any taxes that are due.
401K are good but there are other retirement options.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
A 401(k) defers taxation on both deposits and earnings. The money deposited to a normal 401(k) is not subject to ordinary income tax in the year that the contribution is made. That money is taxed as ordinary income when it is paid out. As mentioned, 401(k) money is also subject to surtax if taken prior to age 59.5.
That is a great question! In any retirement vehicle the money in it will be taxed at some point. In a deferred vehicle like a 401k, the contributions that fund it are made before taxes are taken out. As a result, once the money begins to be withdrawn, the Government collects the tax on those contributions, and any growth that has occurred on that money. This works out well if you've moved into a lower tax bracket than you were in when making the contributions.
A good retirement plan will balance out that tax loss by including a tax free vehicle like a Roth IRA (the contributions that fund it are taxed going in, so tax free when withdrawn) or a similar investment. Talk to a trusted adviser, and see what might work best for you, okay? Thanks for asking!
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401K are good but there are other retirement options.
A good retirement plan will balance out that tax loss by including a tax free vehicle like a Roth IRA (the contributions that fund it are taxed going in, so tax free when withdrawn) or a similar investment. Talk to a trusted adviser, and see what might work best for you, okay? Thanks for asking!