A 401(k) continues to be a popular retirement plan many employers offer. Offered since 1981, they have produced many millionaires. You may be wondering, though, if 401(k) benefits are still a good choice in 2024.
Two Kinds of 401(k)s
Most employers offer their employees one kind of 401(k)—the traditional version. If you want an instant tax deduction, it can be just what you need. Every dollar you contribute will give you a deduction equal to the amount contributed—up to the allowable limit. They are automatically taken from your paycheck and put into your 401(k).The money in your retirement account grows tax-free until you withdraw it. At that time, you will pay taxes on the withdrawal at the same level as your normal income tax rate.
When you reach 73, you must make the required minimum distributions (RMDs) annually. If these withdrawals are sizable, the taxes you need to pay can be rather hefty, and they may put you into a higher tax bracket.
The Roth 401(k)
The Roth version of the 401(k) has a couple of differences from the traditional one. Many employers do not offer it. Although it is not for everyone, it may be the better option. All contributions are after-tax, which means you do not get a tax deduction. This feature lets your money grow tax-free, and you do not owe any taxes when you make withdrawals.Another excellent feature is that you have no RMDs with a Roth 401(k). You can keep the money in the account and let it grow as long as you want. You could even save it for your heirs if you want to—and if you do not need it in retirement. You can also make withdrawals when you need them.
Because there are no taxes to be paid on withdrawals once you reach 59½, Money.USNews says that all the money in the account is yours. It can make it easier to calculate how much money you will have in retirement.
Consider Using Both 401(k) Types
If your employer offers a traditional 401(k) and a Roth 401(k), you can use both to your advantage. Money put into a traditional 401(k) will reduce your taxable income now, but you must pay taxes when you withdraw it. Putting some of your retirement money into a Roth 401(k) gives you tax-free money in retirement, which will reduce your taxes once you retire and need the money. It will also reduce the size of your RMDs from your traditional 401(k).Contribution Limits
Every year, the Internal Revenue Service (IRS) changes the contribution limits. In 2024, you can contribute up to $23,000 to your 401(k). If you are older than 50, you can contribute another $7,500, giving you a maximum contribution of $30,500.Contribution limits are an all-inclusive limit. No matter how many 401(k)s you may have, you cannot contribute more than the limit in all of them. If you want to contribute more to a retirement plan, you can also have an individual retirement account or get a health savings account (HSA).
Employer Contributions
An employer may also want to help you save for retirement. They may give you a matching contribution to your 401(k) or a set percentage (e.g., 50 percent) of your contribution up to a specified limit. It is optional for them.
When an employer contributes to your retirement account, CNN reveals that they can bring the total up to $69,000 in 2024 if you are under 50. If you are 50 and older, you have a contribution limit of $76,500.
The fact that an employer can contribute to your 401(k) is a powerful reason to use it as a tool to save money. Nowhere else will you get as much free money to help you create a secure retirement.
Investment Options
Employers’ retirement plans often enable you to use the money in your 401(k) to make investments. Some plans will permit more investment choices than others. MSN says it is typical for plan creators to put in up to 25 different mutual funds. If you use them, your money can grow even faster.Student Loans and Saving for Retirement
Saving money for retirement can be difficult if you are paying off a student loan. In 2024, employers can now contribute money to your retirement account equal to your loan payment. It is their choice as to whether they will do it or not, but that option is now open to them.The Self-Employed Can Get a 401(k)
People who have their own business can get a solo 401(k)—the IRS calls it a one-participant 401(k)—if they do not have any employees. NerdWallet says you can only use it if you have no full-time employees, but it can cover you and your spouse.You can open a solo 401(k) if you have an employer identification number (EIN). Many online brokers offer traditional and Roth 401(k)s. Since a self-employed business owner is both the employer and the employee, you can contribute the allowable amount plus a profit-sharing contribution of up to 25 percent of your self-employment income. The limit on the compensation you can use to determine your contributions for 2024, NerdWallet says, is $345,000.
Getting Loans From a 401(k)
Although a 401(k) retirement plan is intended to grow your money until you retire—or at least until you reach 59½—it may be possible to access some of it earlier. Generally, you can withdraw some of it without a penalty as a first-time home buyer or in emergencies.Some employers may allow loans, but they usually must be repaid within five years. The balance will be due immediately if you get fired, quit, or laid off.
Talking to your employer about their 401(k) retirement plan will help you understand the details of the plan they offer. If you are self-employed and plan to open a 401(k), compare fees and other costs with more than one company or bank and the investment options within the plan before choosing one.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
