The 401 (k) is a type of retirement fund unique to the United States which allows taxpayers to set aside money for retirement while achieving favorable tax treatment of their contributions. But did you know that there are several types of 401ks, not only the traditional type that we know so well?
In 2006, Congress created the Roth 401k, which acts much like the Roth IRA of the same name. The plan was named after William Roth, former senator from Delaware, who sponsored the bill which introduced this plan. How does a Roth IRA operate? Instead of deducting the contributions you make to your plan this year, you pay income taxes on your contributions this year and not later on down the road. Just like the traditional 401k plan, investments in Roth 401k plans grow tax free.
A Roth 401k plan can sometimes make sense instead of a traditional 401k plan if you expect your income (and marginal income tax) to increase over time. However, your contributions are going to be taxed at a certain point, so it's sort of up to you to figure out which plan makes the best sense for you. Also, it's important to check with your plan administrator to see what kind of plans are offered. Roth 401k are generally less common than the traditional version.
What if you work in the public sector? Well, there's also a variant of a 401k plan called a 457 plan. These plans all have arbitrary names because they're named after the piece of tax code that brought them into effect. The key difference between a 457 plan and a traditional 401k plan is that a 457 is usually offered by government entities, and allows distributions without the 10% early withdrawal penalty.
But that's not all. Another name convention alternative to a 401k is the 403(b). 403(b) plans are usually offered by public education organizations and non-profit organizations. Of course, we could go on and on -- but these are the most common types of retirement funds offered by employers.
In 2006, Congress created the Roth 401k, which acts much like the Roth IRA of the same name. The plan was named after William Roth, former senator from Delaware, who sponsored the bill which introduced this plan. How does a Roth IRA operate? Instead of deducting the contributions you make to your plan this year, you pay income taxes on your contributions this year and not later on down the road. Just like the traditional 401k plan, investments in Roth 401k plans grow tax free.
A Roth 401k plan can sometimes make sense instead of a traditional 401k plan if you expect your income (and marginal income tax) to increase over time. However, your contributions are going to be taxed at a certain point, so it's sort of up to you to figure out which plan makes the best sense for you. Also, it's important to check with your plan administrator to see what kind of plans are offered. Roth 401k are generally less common than the traditional version.
What if you work in the public sector? Well, there's also a variant of a 401k plan called a 457 plan. These plans all have arbitrary names because they're named after the piece of tax code that brought them into effect. The key difference between a 457 plan and a traditional 401k plan is that a 457 is usually offered by government entities, and allows distributions without the 10% early withdrawal penalty.
But that's not all. Another name convention alternative to a 401k is the 403(b). 403(b) plans are usually offered by public education organizations and non-profit organizations. Of course, we could go on and on -- but these are the most common types of retirement funds offered by employers.
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Check out Christopher Stanley's blog at 401k Limits to get simple answers to complicated questions about retirement. Visit www.401klimits.net to find the best advice on 2011 401k plans .