Are you planning for your own future? How many years are you counting before you retire? Are you worried about your retirement savings plan? Have you selected the right plan for you? Or are you still undecided on what would be the best plan for your retirement savings? Let’s review some information about these questions and maybe later after describing and discussing all the information, you may be able to decide what to do today.
I’m sure you have heard about the traditional or conventional 401(k) plan and a Roth 401(k) plan. Have you done some readings about these subjects? Are you aware of their background or even the simplest definition? If yes, but you have just a small understanding about these and are still interested in knowing more, or if you don’t have any idea about such plans, we’ll discuss a very simple definition of each so that it will be very clear for you.
The 401(k) plan is a retirement savings plan, a traditional one actually, and it was authorized, introduced and approved by the United State Congress in 1978 under Internal Revenue Code section 402A in which it states that employees or workers can make a payment or contribute pre-tax earnings to the 401(k) or retirement plan. These pre-tax earnings that are paid by employees were put to one side or one special account by their employers and the money can be invested in different or various options that is available on the retirement savings plan. Take note also that pre-tax earnings are called elective deferrals.
On the other hand, Roth 401(k) retirement plan was endorsed as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), and with this plan, staff or employees can decide or choose whether to contribute a post-tax elective deferrals or a pre-tax elective deferrals in or under the 401(k) plan. So this Roth 401(k) plan is more or less a type of retirement plan wherein you can choose between paying as early as now or deduct it on your salary or wage.
To sum up and compare both retirement plans, the traditional 401(k) is a type of plan wherein employees were about to pay the deduction through their monthly wages, so it would be like letting your employer collect your payment and then put it in a certain account and they can use it or rather invest it in some available types of investments, while for the Roth 401(k) it would be the employee who will directly pay the tax upfront since they don’t want it to be deducted on their monthly salary or they can also do the traditional 401(k). In short, they can either choose to pay upfront or upon salary – they can do it on a pre-tax elective deferral or post-tax elective deferrals.
Another important thing that you have to remember on paying for a retirement savings plan is that if you are an employee with an age below 50 then the amount that you are about to pay or should be paying is $15,000, that’s per year but if you are a person who is at the age of 50 and above, then the amount that you were about to pay is $20,000, this is also per year. So that’s like an additional of $20,000 for above 50 year old people.