How To Make The Most of Your 401(k)

Retirement is a subject that, these days, seems to be a growing concern for a large percentage of the American public. With the economy only beginning to fully recover from the crash in 2008, many people are beginning to wonder what the future of retirement will entail, and what they can do to be prepared for when the time actually comes to retiring.

Whether you are just getting into the job market and beginning to understand your employee benefits, or you have been in for a while and need to start seriously considering your retirement plans, having a 401(k) is a vital component to reaching your financial goals at the end of your career. And yet many of us have no idea what a 401(k) entails, or even how it works. Here are just a few tips to help you understand your retirement plans and how best to prepare for them.

1. Understand how taxes will affect your plan.

Before you decide on what kind of retirement plan you want to select, you need to understand how you will be taxed on the money that you put aside for your retirement. In some programs, you are not taxed on the dollars that you set aside to save until the time when you begin to withdraw it, and with others it is the exact opposite. Knowing how you want to spend your money after you retire can have a huge affect on the type of plan that you select. Before making such a decision, consult with your local tax expert about what the best option is for you.

2. Understand the types of 401(k) plans that are available.

Like everything else these days, you have a number of options to choose from when it comes to selecting a 401(k). Listed below are four different types of 401(k) plans you can select for your retirement.

  • A. Traditional 401(k)

A Traditional 401(k) allows you to set aside your own money (up to $18,000/year) that will be matched by your company or employer. These funds are not taxed when you set them aside for retirement. Instead taxes are paid on these accounts when the time comes to actually use the money you have set aside for them.

  • B. Roth 401(k)

Roth 401(k) plans work in the opposite way as a traditional 401(k) plan. Employees that select a Roth 401(k) pay taxes on their retirement funds right away, providing you with a tax benefit upon retirement. Be sure to consult your tax expert before deciding to go with a Traditional or Roth plan.

  • C. Individual/Solo 401(k)

If you are a small business owner, this is generally the more preferred method for preparing for your retirement. Individual 401(k)’s are geared more to the independent business owner or spouse-run business because they allow the owner to set aside a larger amount of money each year. The reason for this is because an independent business owner cannot be expected to match his or her own retirement deposit because they are the sole proprietors of the business.

  • D. Simple 401 (k)

Simple 401(k) plan, like the Individual 401(k), is also geared towards the small business owner, except that it applies to small businesses with less than 100 employees, not just an individual or a married couple. You should be aware, however, that if you elect to go with the Simple 401(k), you are not allowed to have any other additional retirement plans in place. Again, if you are a small business owner, consult with your tax expert or accountant before deciding which plan is best for you.

3. Other options: Individual Retirement Accounts

People often move to consider an Individual Retirement Account when (and if) they are financially able to set aside the maximum dollar amount allowed by the company and still want to set aside more of their income for that year. Money that is put into an IRA is tax-deferred, once again, until such a time as you decide to use it. You can also utilize funds that are put into an IRA to make other investments such as purchasing stock or setting up mutual funds. Again, be sure to consult with a tax expert or your financial institution before deciding what your best option is.