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401(k) - Unraveling Your Dilemma

By Manjumodiyani @HoshiyaarChaddi

Are you looking for the best solution to your retirement planning worries? Do you wish to be financially sound post-retirement? Then you are at the right place and moments away from making a right choice.Know about 401(k), a popular tool for retirement planning. Let us begin the discussion by understanding the features, benefits and implications of 401(k).401(k) - Unraveling your dilemma
  • What is 401(k)?
As mentioned earlier, 401(k) is a tool for retirement planning. It is an investment vehicle where your funds grow tax-deferred. 401(k) has acquired its name from the subsection of the tax code, i.e., the IRC (Internal Revenue Code) which came into force in 1978.401(k) basically is a retirement savings plan provided by the employer. You are allowed to contribute a certain amount from your paycheck before tax to your 401(k) savings account, which will form a part your retirement fund. No taxes are payable until you begin to make withdrawals post-retirement.
  • The working and benefits of 401(k)
The first step is to decide how much amount you wish to contribute from your paycheck. The amount is automatically deducted every month from your salary and credited to your individual account. The employer also contributes certain amount from his side to be credited into your individual account, which is usually 50% of your contribution. For example, if you put in $1200 from your monthly salary into your 401(k) account, your employer will contribute $600.The maximum contribution you can make to your 401(k) account is $17,000 and $22500 if you have attained 50 years of age. You have a choice to invest this amount into a combination of stocks, bonds, money market instruments, mutual funds. The funds will grow tax-deferred until you start making withdrawals. Withdrawals are subject to ordinary tax rates. 
  • 401(k) v/s  Roth 401(k)
The Roth 401(k) is the mirror image of 401(k). In case of Roth 401(k) the amount contributed is deducted from your paycheck post tax. That means no taxes are due on your withdrawals. Roth 401(k) is suitable for the people who are young and do not have a very high income. Paying taxes on a small income today and enjoying tax free retirement savings tomorrow is an optimal choice.If you have a good income and you fall in a high tax bracket it would be wise if you choose a traditional 401(k) plan. This helps defer the huge tax bills and help your funds grow tax deferred.You can invest your money in 401(k) and Roth 401(k) simultaneously to optimize your investment. However, the combined amount must not exceed $17500 or $22500 in case you are 50 years of age or above.
  • Withdrawals before retirement
It is mandatory that your funds stay invested in the retirement savings account until you attain the age of 59.5 years. However, if you choose to withdraw funds due to financial emergencies or any other reasons before attaining the prescribed age, the IRS (Internal Revenue Service) levies 10% tax on early withdrawals. Also the amount you withdraw is subject to tax at ordinary tax rates. Hence, 401(k) is a lucrative investment product to put in your money and make it grow tax-deferred.

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