If you’ve just started a new job, then you may have been asked whether or not you want to participate in your new company’s 401(k) plan. Whatever your case may be, it is almost always a good idea to say yes to this.
So, what is a 401(k)?
401(k) is a term that is taken from the United States tax code which allows employees to create tax-advantaged retirement accounts for themselves.
Employers can also contribute and match 401(k) plans, and it is an awesome benefit offered by many companies. If your company offers a match, then you better be taking them up on it. If not, it’s like you are just throwing money away! It’s a work benefit that you must be taking them up on.
There are two different types of 401(k) plans – Roth and Traditional.
A Roth 401(k) is a little different from a traditional 401(k) account in that there is no tax deduction on the amount that is contributed to the retirement account. This means that no money is owed in taxes when the Roth account is withdrawn from.
A Traditional 401(k) is where you contribute money to a retirement account and it is tax-deferred until you retire. Then, when you finally start withdrawing money from it, you will pay taxes on it. Until that time though, there are no taxes that you would be paying. When you contribute to a Traditional 401(k) plan, pretax dollars are being contributed to the plan. This helps decrease your taxable income when tax time comes around, and it will decrease the amount of tax dollars that you owe.
Are there limits to how much you can contribute?
There are limits. For 2014, the deferral limit is $17,500. If you are age 50 or older at the end of the calendar year you can also make additional catch-up contributions of up to $5,500.
If your employer contributes to your 401(k) as well (matching contributions, etc.), then the limit is $51,000 for 2014, or $56,500 for those aged 50 and older at the end of the calendar year.
The maximum allowable employer/employee joint contribution limit remains at $51,000 for 2013 (or $56,500 for those aged 50 and older).
Are there fees to participate in a 401(k) plan?
This all depends. There are different fees, and sometimes they are charged to your employer, or they may be charged to you. The average fee is usually somewhere around .80%, or around $250.
Do you participate in a 401(k) plan? What do you think of it?
Image via Flickr by TaxCredits.net
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