The government offers taxpayers the 401(k) as a retirement savings plan sponsored by their employer. Using this program, workers are able to save and invest a portion of their paycheck before the employer withholds taxes. According to The Wall Street Journal, the employer matches a certain percentage of the savings invested by the employee.Know More
The 401(k) plan receives its name from the section and paragraph numbers in the Internal Revenue Code. Congress passed the Tax Reform Act in 1978, including the tax-deferred savings plan, as an incentive to encourage citizens to save for retirement and lower their taxes, according to HowStuffWorks.
While a traditional 401(k) plan offers tax deferment, allowing the individual to wait to pay taxes until the investor withdraws the money, the Roth 401(k) plan does not defer taxes. The advantage of the traditional plan is that the investor pays taxes after retirement, when supposedly his income is lower. With the Roth plan, the earnings on the investment are tax deferred until retirement, and in many cases, investors pay no taxes on these earnings, according to Wikipedia.
To discourage citizens from making early withdrawals of funds from their 401(k) plan, there is a 10 percent penalty for early withdrawals. Wikipedia reminds employees that since most employers require them to withdraw money when changing jobs, the government provides a chance to "roll over" their savings into another qualified plan to avoid this penalty.Learn more about Financial Planning
Some retirement tips from Kiplinger include consolidating your savings as you approach retirement and increasing your contributions to a retirement plan if you are 50 or older. Having all your savings in one Individual Retirement Account lets you keep track of your savings and investments as opposed to having multiple plans with former employers. Guard against financial scams by keeping your personal information and bank account details secret.Full Answer >
The Thrift Savings Plan is a retirement savings and investment plan designed for federal employees and members of the uniformed services, explains TSP.gov. It is a contribution plan, meaning the available retirement money is dependent upon the funds accumulated during the years as an employee.Full Answer >
Distribution options for a 401(k) include rolling over the savings into an individual retirement account, leaving the savings in the former employer's retirement plan, moving the savings into a new employer's retirement plan or withdrawing as cash, states Wells Fargo. These are options to consider when retiring or changing jobs.Full Answer >
Benefits of using life insurance as a retirement savings plan include the ability to grow tax-deferred cash value and take out loans against the policy, reports U.S. News & World Report. Older policies may earn enough dividends to pay the premiums, so cash value continues to grow without further investment. However, 401(k) plans and IRAs grow tax-deferred cash value as well, and these plans are less costly to fund and maintain than life insurance policies, points out CNN Money.Full Answer >