There are several types of retirement plans that you can consider when it comes to preparing for your retirement. Of course, all of these plans aim to help people set up and gain financial stability as soon as they have reached their retirement age. Now, aside from the traditional 401 (k) plan that you have heard about or are already familiar with, there is another type of 401k policy or account that you need to consider; and it is referred to as Roth 401k. What is it and how will it benefit you in the long run?
The Easy to Understand Roth 401k Breakdown
Compared to the traditional 401k plan, the Roth 401 k is considerably new. It offers its account holders the option of going tax-free when you are finally allowed to withdraw money and make use of your funds. But unlike the traditional type, clients will be required to pay taxes while making contributions.
This is also perfect for employees who predict and expect that they will be included in the higher tax bracket during retirement. One thing that people should know is that, the Roth 401-k plan does not have much restrictions compared to the Roth IRA, which those with belonging to the higher pay-grades or brackets find restricting.
There are those who think about splitting their funds between a traditional and a Roth 401k. So if you are one who is considering this possibility, you may do so. This is to ensure that you will be able to diversify your retirement options in terms of your choices in the future. Now, for people who are considered to be low-earners, they can opt for a Roth 401k to avoid taxes upon reaching their retirement age.
Roth 401k Contribution Rules
If there is one category among the different Roth 401k rules, which potential investors should know about, it would definitely how much their Roth 401k contributions should be.
- Its contribution rules are basically similar to its more traditional counterpart. You can actually contribute a maximum total of $18,000 if you belong to the below 50 years old bracket.
- For those 50 and older, they can complete a catch-up amount of $6,000. This should total to $ 24,000.
- These rates or amounts can definitely change depending on the state of the economy or the currency’s inflation rate, and are announced every year by the IRS.
The Roth 401k can be very beneficial for both high and low income earners who do not want worry about paying distribution taxes in the future. Be sure to consult experts to find out more about your choices as well.
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