The 401(k) retirement plan, first popularized in the 1980s, is an excellent way to put aside money for retirement.
Like other retirement plans — traditional IRA or Roth IRA — a 401(k) invests your money in a customized mix of individual stocks, money-market funds and bonds to maximize your return.
But which type of retirement plan is right for you?
What makes a 401(k) so popular?
The first reason why a 401(k) is so popular with employees is that contributions can be automatically withheld from each paycheck.
You set the amount — usually as a percentage of gross wages — and the HR department does the rest. There’s a lot to be said for “easy.”
Even better, money that you contribute to a 401(k) plan is invested with pre-tax dollars. So every dollar that you set aside in your retirement plan lowers your taxable income for that year.
The flipside is that you will have to pay income tax on any money that you withdraw from the 401(k) account during retirement.
Which leads to an important question…
Do you expect to be in a higher or lower tax bracket when you retire?
If you and your spouse make good income now, you will likely earn less when you retire. In that case, a 401(k) or a traditional IRA makes the most sense, because you can defer taxes until later.
But if you’re young and single and making a decent but modest salary, it’s probably smarter to pay taxes now and withdraw the money tax-free later, when you’re in a higher tax bracket.
In that case, a Roth IRA is probably best for you.
In truth, which type of retirement plan you choose is less important than simply investing in retirement. Tweet this
Get started early and let compound interest be your friend!