Since the 401(k) Plan has so many benefits, everyone must want to deposit more money into the 401(k) Plan account, so the IRS has set several deposits in the 401(k) Plan account each year. limit. In 2019, as an employee, you can deposit up to $19,000 into your 401(k) Plan account. If you are over the age of 50, you can deposit an additional $6,000. If your employer has an employee match, then your employer Have no more than $56,000 in your 401(k) Plan account with you ($62,000 over age 50)
age in 2019 Employee Contribution Limit Employee Contribution + Employer Match Limit
less than 50 years old $19,000 $56,000
over 50 years old $25,000 $62,000
How to Choose a Different 401(k) Plan
For pension plans, there are two popular ones in the United States, 1. Defined benefit pension plan (fixed benefit pension plan) 2. Defined contribution pension plan (fixed pension plan), the first one is usually referred to as the DB plan, the second Two are referred to as DC plans. The following giant panda will give you a detailed introduction.
DB plan refers to an employer-led pension plan. If an employee retires and loses employability, a fixed amount of retirement allowance can be determined according to factors such as working years and position. It is usually paid monthly until the beneficiary dies. It is the company’s commitment to give employees a certain amount of pension after retirement. The investment risk and portfolio management are all borne and controlled by the company. This type of pension plan has certain restrictions on the time and form of the withdrawal amount for employees without paying fines, and the employer Assets and liabilities need to be recorded in the balance sheet.
The DC plan is that the company and the employees deposit a certain amount of money in the retirement account together. The risk and portfolio management of the investment are borne by the employees themselves, so the future value and benefits are uncertain. For companies, pensions do not need to be recorded in the balance sheet, but expenses are recorded in the income statement.
For most companies now, the 401k generally adopted is a defined contribution plan, so there is still a certain risk in the profit and loss of investment.
Many students may find that their company has given them several different 401(k) Plan options, so what should they save? The difference between different 401(k) Plans is mainly reflected in taxation. There are three common options for you to choose from:
- Traditional 401(k) Plan (pre-tax): This is the most common type of plan, and most of the 401k plans discussed in this article are this traditional 401(k) Plan. You don’t need to pay tax when you save money, and you pay tax when you withdraw your money in retirement. The point to note is that withdrawing money in retirement is to get the money deposited and investment income, so when you pay taxes, you also pay taxes corresponding to the sum of the principal and income.
- Roth 401(k) Plan: The difference from the previous one is that this one is taxed when you save money now, and investment income does not need to be taxed, so you don’t need to pay tax when you withdraw money when you retire.
- After-tax 401k Contribution Plan: This is a popular plan in recent years, and not all companies have it. First of all, this plan has a very different place from the above two plans, which is the annual limit of the deposit. For example, as mentioned above, in 2019, the deposit limit for both Traditional 401k and Roth 401k is $19,000, and the total amount of money that you and your employer can deposit in the 401k account is $56,000, but for after-tax 401k contribution For a plan, your deposit limit is $56,000. Is it possible to save more money all at once? The after-tax 401k contribution plan does not exempt investment income from tax like the Roth 401(k) Plan, but the tax payment of the investment income part can be deferred, so it also has some advantages.
For the above three 401(k) Plans, each has its advantages. Let’s first compare the traditional 401(k) Plan and the Roth 401(k) Plan.
First, let’s talk about the benefits of a Roth 401(k) Plan. A Roth 401(k) Plan can save more money each year than a traditional 401(k) Plan. Although from the IRS policy, the Roth 401(k) Plan and the traditional 401(k) Plan seem to have the same upper limit, since the Roth 401(k) Plan is money deposited after paying taxes, so There’s more money in retirement than in a traditional 401(k) Plan.
When you reach the age of 59.5, when you can withdraw from the retirement account without penalty, the Roth 401(k) Plan can be withdrawn in one lump sum without paying any additional fees, but the traditional 401(k) Plan account needs to be reasonably selected The withdrawal schedule is divided into several years to withdraw, because the traditional 401(k) Plan is to be included in the income of the year, and a large one-time withdrawal will cause the tax rate to increase, which is contrary to the original intention of participating in the 401(k) Plan.
Therefore, young people who have just started working, if their income is not very high, in the case of a relatively low tax rate, and it is expected that their income will increase in the future, the tax rate will increase, and they are very suitable to participate in the Roth 401(k) Plan.
At this time, let’s talk about the benefits of a traditional 401(k) Plan. Because the part paid by the traditional 401(k) Plan is not included in the income of the current year, because many tax deduction provisions are based on the adjusted gross income of the current year, Adjusted Gross Income (AGI), so participating in the 401(k) Plan may make you Take advantage of additional tax breaks or allow you to avoid additional taxes. A Roth 401k does not have this benefit of a traditional 401(k) Plan.
So, from the above introduction, the giant panda will come to tell you about the after-tax 401(k) Plan, which is rarely mentioned by many people, and how to use them after tax 401 (k) Plan flexibly. Maximize your interests? From the above discussion, it seems that compared to the Traditional 401(k) Plan and the Roth 401(k) Plan, it seems that the after-tax 401k contribution plan seems to be the least helpful for tax benefits. What are the benefits of the after-tax contribution plan? The advantage is that this annual deposit (for example, $56,000 in 2019) may be converted into a ROTH IRA, and the investment income of a Roth IRA is tax-free! Regarding what IRA and ROTH IRA is, the giant panda will give you a detailed science in the next article.
Some friends may have noticed that the giant panda is saying that it is possible to convert to Roth IRA, so who can convert? Only the company allows Inservice Transfer to transfer! That said, some companies allow you to transfer an after-tax contribution to a Roth IRA if you work for the company. Specifically, if you choose the after-tax contribution plan when you can make adjustments to the 401k during the year, and you also open a Roth IRA account, then immediately apply for the After-tax 401(k) Plan Transfer the money to a Roth IRA, so that future investment returns of the money are tax-free!
For companies that do not have an Inservice Transfer option, some students are wondering if they should not choose this after-tax 401(k) Plan. They can try it, because if you resign from the original company, the money you saved before It can be transferred to a Roth IRA, and the subsequent income can still be tax-free.