Planning for retirement is not exactly fun. And, it’s not made easier by all these acronyms and numbers. So, considering we write a lot about retirement here at Improve Budget, it’s only right that we should do a breakdown of these different accounts.
Before long, you’ll know your Roth from your IRA and be an expert on your 401(k). So, lean back, relax and master all of these tax-law references while deciding which retirement account is the perfect one to suit you and your money.
401(k) Retirement Plans
Traditional pensions are long gone, and they’ve been replaced by the 401(k). This is a retirement plan that for-profit companies can offer employees. But, you’ve heard of 403(b) and 457(b) too? These plans are similar but are offered to employees of non-profit companies instead.
401(k) – the name of this retirement plan is in direct reference to the section of the law that defines 401(k) retirements plans. 403(b) and 457(b) got their names this way, too.
What’s a 401(k) with employer match? This means that your employer will match a portion of the money you contribute to your account. Basically, free money.
Having a 401(k) with employer match sets you up ideally for retirement because you’ve got the chance to save a lot more. A trick to make the most of this is to contribute however much it takes to get the biggest match.
But be aware, some companies require you to work for them for a certain length before you can keep the money that your employer has matched. This term is called ‘vested’, and each company has its own rules on how long it takes for an employee to become vested.
As of this year you can contribute;
- Up to $18,000 to your regular 401(k) plan. Or, if you’re 50 or older you can add an extra $6,000 which is called a catch-up contribution.
- Up to $12,500 to SIMPLE (Savings Incentive Match Plan for Employees) 401(k) plans. These are typically available to those who work at a small business. If you’re 50+ you can make a catch-up contribution of $3,000.
All the money placed in a 401(k) shouldn’t be accessed until you reach 59½ years of age. However, if you try to withdraw it before you will have to pay a penalty fee.