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, when it comes to your retirement, is a 401(k) right for you?
What makes a 401(k) so popular?
The first reason why a 401(k) is many employees favorite is because contributions are automatically withheld from each paycheck.
You set the amount — usually a percentage of gross wages — and the HR department does the rest. The money is taken from your paycheck and deposited into your 401(k) account before you see it. There’s a lot to be said for “easy.”
Even better – your contributions are invested as pre-tax dollars. So every dollar set aside in your retirement plan is deposited tax free. In turn, it also lowers your taxable income for that year.
The flip-side? You have to pay income tax on the money withdrawn from the 401(k) account during retirement.
This 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 a good income now, there’s a chance you’ll earn less in retirement. In that case, a 401(k) or a traditional IRA makes the most sense. Both accounts allow you to defer taxes until later.
But, if you’re young, single and make a decent salary, a Roth IRA is probably best for you. That way when when you’re in a higher tax bracket later, the money can be withdrawn tax-free.
In truth, which type of retirement plan you choose is less important than simply investing in retirement. Tweet this
The most important part of retirement planning is to simply get started early and let compound interest be your friend.