Welcome back to the Successful Financial Strategies blog! In our last post, we were happy to announce our partnership with AssetLock®. Through this partnership we are better able to provide our clients and our advisors assess to 401(k) and other retirement saving accounts so they can have a faster response to changes in the market climate that directly affects their accounts. To learn more about this exciting partnership and how you can have access to pertinent information right on your phone, read “AssetLock® & SFS Join Forces.”
Basics of 401(k) That You Need to Know
Since we just discussed the benefits of AssetLock, we thought it would be a good idea to discuss the basics of a 401(k). In many cases, we find that clients know very little about their retirement accounts and assume that is all is well. However, as we have discussed many times, to have a sound financial future, you must make proactive steps toward your goals. The only way to do that is to understand what your 401(k) is and how it can serve you.
What Does 401(k) Mean?
The term “401(k),”which has become synonymous with the actual retirement account name, is a section of tax code that allows for individuals to create such an account: specifically, individuals are allowed to legally utilize tax-advantage retirement accounts.
What is a 401(k) Account?
A traditional 401(k) account allows an individual to make contributions into a savings account pre-tax. Because deductions are made before tax, the individual pays less income tax. Tax-deferment lasts until retirement when the individual begins to withdraw from their account. Taxes, however, will never be paid on dividends, interest, and rents. The owner of the account can start making withdrawals when they turn 59 ½.
What is a Roth 401(k) Account?
A Roth 401(k) is similar to a traditional 401(k) account. However, tax deductions occur when the individual makes their contributions to their account. This means that when they begin to withstand from their account during retirement, that they will not owe any taxes.
What Are the Benefits of a 401(k) Plan?
A 401(k) isn’t the only retirement account available. However, it has been one of the most popular retirement savings plans and here’s why:
- Lowers your taxable income
- Dividends are never subject to taxes
- Many employers offer matching contributions which is essentially free money
- You can contribute to your 401(k) for as long as you want
- Protected from judgement creditors as a Employee Retirement Income Security Act account
Though a Roth 401(k) plan allows you to pay taxes upfront, unlike its counterpart the Roth IRA, there is never an income limit for contributions.
The Bottom Line
A 401(k) plan isn’t the only retirement plan, but it is one of the most popular types of retirement savings accounts. If you are given the opportunity to contribute to a 401(k) plan and, on top of that, your employer offers matching or contribution sharing, we would highly recommend you take advantage of these benefits.
If you have questions about 401(k)s, retirement savings accounts, financial planning, or other related questions, the financial advisors of Successful Financial Strategies would love to help you. We offer our services to clients in the Arden and Hendersonville area and beyond. Learn more about what we can offer you and more by visiting our website.