Why invest in a 401(k)?
Your 401(k) contributions are taken directly out of your paycheck before your income taxes are deducted. That means your gross income is reduced, so you pay less in income taxes.
Also, as long as your money stays in the plan, you won't pay a penny in tax on your investment returns. All the money you invest compounds year after year without any tax bill until you're ready to retire. View Related articles
What you should understand about 401k Match
Depending on the terms of your employer's 401(k) plan, your contributions to your retirement savings may be matched by employer contributions.
When your employer matches your contributions, they add a certain amount to your 401(k) account based on how much you contribute annually. The most common way your employer will determine matching contributions is to match a percentage of your contribution, up to a certain limit.
Why invest in an IRA?
Many financial experts estimate that you may need up to 85% of your pre-retirement income in retirement. An employer-sponsored savings plan, such as a 401(k), might not be enough to accumulate the savings you need. Fortunately, you can contribute to both a 401(k) and an IRA.
You should try to contribute the maximum amount to your IRA each year to get the most out of these savings. Be sure to monitor your investments and make adjustments as needed, especially as retirement nears and your goals change
What you should understand before picking the type of IRA you want...
Traditional IRA - You make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
Roth IRA - You make contributions with money you've already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
Rollover IRA - You contribute money "rolled over" from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
WHAT HAPPENS WITH YOUR 401(K) WHEN YOU LEAVE A JOB?
You'll have a lot to finish up before your last day of work if you decide to leave your job. One important thing is deciding what to do with your 401(k) plan. In this article, we'll go through four options for what to do with your 401(k) when you leave a job.