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When you start working in a new company, you usually have some decisions? to do in those first days at work.
and these decisions can be if you want to subscribe to a Roth 401 (k) or 401 (k) traditional plan. You understand having a retirement plan in place is important, but how do you know which plan is right for you?
Here are answers to some common questions to help you understand your options.
What is a 401 (k) traditional plan?
If you enroll in a traditional 401 (k), your employer deducts your contributions from your paycheck. As an added benefit, your taxable income is reduced by the amount of your contributions.
However, you always pay the Medicare tax and Social Security, also known as FICA on your full salary.
When you receive a W-2 form next January, taxable wages referred are already reduced by your tax-deductible contributions.
When you retire, you then pay tax on withdrawals from traditional 401 (k) plan. Tweet this
What is a 401 (k) Roth plan?
If you choose a 401 (k) Roth plan, the company still deducts your contributions from your paycheck. However, your contributions will not reduce your taxable income. In other words, you pay your taxes on Roth 401 (k) contributions up front.
The good news is retired, you can usually take withdrawals from your Roth 401 (k) tax free plan.
Can I choose both?
contribute to both Roth and traditional pension plans is not only possible, but it may be a good idea.
Let's say you retire at age 66, and for the first few years, you have a relatively low income retirement. It would be a great time to withdrawals from a traditional 401 (k) while you are in a lower tax bracket -. The higher the tax rate, the more money deposited into your bank account
On the other hand, you can have a year when you sell an investment property, work as a consultant or have d other taxable income pushes you into a higher tax bracket.
In this case, if you want to continue taking withdrawals from your retirement plans, it would be a great year to make tax-free withdrawals from a 401 (k) Roth plan you have already paid tax on the money you receive.
There may be many years you may wish to make withdrawals both your traditional 401 (k) and your Roth 401 (k) accounts. Having both types of plans gives you greater financial flexibility than having a single plane.
Can I convert my traditional 401 (k) to a Roth 401 (k)?
If your plan allows it, you might be able to convert some or all of your current traditional plan to a 401 (k) Roth plan.
There is a catch, however. You must pay in advance the tax on pretax contributions and earnings that you are converting.
So what plan is best?
If you expect to have substantial income in retirement, it may be best for you to use a Roth 401 (k). But if you expect to be in a lower tax bracket after you retire, you may prefer a 401 (k) traditional plan.
However, for practical reasons, most of us are not sure how much income we will have when we retire -. especially if retirement is years or decades away
If you can commit to contribute to a Roth map - great. If having a project of lower tax law is more beneficial to your financial stability, go with the 401 (k) traditional plan. The important thing is to choose a plan and use.
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