Happy Friday DINKS. It’s that time of the year again…time to file our taxes. One savings strategy for both our taxes and our retirement is investing into our 401k, or our RRSP for our Canadian DINKS.
There are several types of 401k plans available to investors. The most common type of 401k is a company sponsored 401k which is offered by employers to employees. Employees contribute a percentage of our salary through a payroll deduction, and our employer makes matching contributions on our behalf. The contributions are usually matched on a 2:1 ratio. Meaning for every $1.00 we contribute, our employer contributes $0.50. Contributions into traditional 401k plans are from pre tax money which means that our contributions are not taxed, but our withdrawals will be.
We can also have an Independent 401k. This type of 401k plan is available for people who are self employed and are operating a sole proprietorship or a small business. In this case the employer is also the employee and therefore they make both types of contributions into an Independent 401k.
A Roth 401k is another type of employer sponsored investment savings account. However, this type of account is funded with after tax money which means that money on our contributions is taxed, but our withdrawals will be tax free. This type of plan is good for investors who think their retirement income will be higher than their current salary. They will pay tax now on their investments, and save on tax in retirement.
Here are some posts from around the web about 401k plans:
50 Plus Finance discusses the benefits and myths of a 401k for small and mid size businesses in his post Is My Business to Small for a 401k? I am totally in love with Dave from 50 Plus Finance; well, as in love as a 30 year old can be with a 50 plus year old man. I am in love with his writing. His posts are always informative and come from personal experiences.
Financial Samurai states his opinion on the low contribution limits of 401k plans in his post View Your 401k Like Social Security And Write It Off. He stresses the importance of investing in a 401k plan, but admits that investing in a 401k alone is not enough to save for a comfortable retirement. He stresses that must make other investments to ensure a financially comfortable retirement.
Frugal Dad suggests that we forget everything we know about saving for retirement and make a new plan in his post Saving With Purpose: Retirement Phase II. He admits that 401k plans and Roth IRAs still play a big part in our retirement savings strategy. However, the idea of employees working with the same employer for 40 years is unrealistic. That was our parents, it’s not us.
Wealth Pilgrim warns us about 401k fraud and various 401k scams in his post Keep Your 401k Safe From Employer Fraud and 401k Fraud.
20 Something Finance says that investing in a 401k is a smart idea for our financial future, but we must be aware of the fees associated with 401k plans in the post The Hidden 401k Fees that Can Crack your Nest Egg.
Happy Investing and Good Luck with Your Taxes DINKS. Have a great weekend.