Best 401k Plans

A 401(k) is a type of retirement savings account, named after the United States Internal Revenue Code Title 26, Subsection 401(k), which outlines this type of account. A majority of Americans (60%) currently hold 401(k) retirement plans as their main form of retirement savings. 401(k) plans are an alternative to traditional pension plans that has moved the responsibility of saving for retirement from employers onto workers.

Facts to know about 401(k) plans: The money deposited into your 401(k) account each month comes from pre-tax income. Like many forms of individual retirement accounts (IRAs), 401(k) plans allow you to reduce your taxable income by depositing untaxed wages into your retirement account.

This means that more money is added to your retirement fund each month to earn interest until you begin to make withdraws. The funds in your 401(k) account have a tax-deferred status, so you don’t pay taxes on this part of your income until you begin withdrawing it in retirement. And the interest earned on your 401(k) savings is never taxed. Other things to know include:

  • Money from your 401(k) can be combined with money from employee pension plans and social security to create a livable income in retirement.
  • You can begin to withdraw funds at age 59 ½.
  • While 401(k) accounts are usually administered by your employer, you can create your own individual 401(k).
  • Employers often match the wages you add to your 401(k) account, but not always. It will depend on your employer’s plan.

Types of 401k Plans

Employee 401(k) Plans This type of plan is set up through your employer, allowing you to contribute a portion of your pre-taxed paycheck to your retirement plan. In most cases, your employer will match your contribution, increasing your tax-deferred savings.

Individual 401(k) Plans This is the 401(k) option used by people who are self-employed. A major benefit is that your company can match your personal contribution, saving both you and the company from paying income taxes on contributions.

Roth 401(k) Plans The Roth 401(k) combines aspects of both the traditional 401(k) and Roth IRA plans. This plan is offered to workers through their employer and contributions are often matched by the employer. However, the main difference from a traditional 401(k) is that contributions are made with taxed wages. The benefit of this plan is that since you’ve already paid income taxes on your contribution, you can withdraw your retirement money tax-free. Like other 401(k) plans, creating a self-directed Roth 401(k) can help you increase your retirement savings even more.

Self-Directed 401(k) Plans Any of the plans listed above can be self-directed 401(k) plans. When a 401(k) is self directed, it simply means that you choose where to invest your retirement savings in order to maximize you return. You can invest your savings in traditional investments such as mutual funds, stocks, bonds, money market investments, and company stock, or in non-traditional investments such as real estate, mortgage notes, or trust deeds. If you choose self-directed 401(k) plan, it’s important to use a self-directed IRA company to guide you through the process of choosing which investments to make with your retirement savings, in order to maximize your capital.

Choosing the from the best 401k plans is not something you should take lightly. Always consult a certified financial planner before investing any of your hard-earned money.