Most people know they should save for retirement; however, using a 401(k) may seem too overwhelming or complicated and prevent many from getting started. When I was in my 20s, I didn’t invest in my company’s 401(k) because I wasn’t sure what would happen if I left my job. Not understanding the retirement account rules held me back, and I don’t want that to happen to you.
While 401(k)s come with critical IRS regulations you should know, they’re not as tricky to master as you might think. If you’re lucky enough to work for an employer offering a 401(k), participating can be a powerful way to build wealth for retirement.
In this guide, I’ll cover everything you need to know about 401(k)s, so you can accumulate a healthy nest egg and have a secure financial future.
What is a 401(k)?
In simple terms, a 401(k) is an employer-sponsored account for workers to save money for retirement. However, if you’re self-employed, you can have a solo 401(k).
The two main types are traditional and Roth. With a traditional 401(k), your employer (or you, if you’re self-employed with a solo 401(k)) deducts contributions from your paycheck before taxes get withheld and deposits them in your account. You defer paying tax on your deposits and investment earnings until you take 401(k) distributions in retirement.
If you don’t qualify for a Roth IRA because your income is too high, a Roth 401(k) or solo Roth 401(k) are great options because they have no income limits.
With a Roth 401(k), your employer deducts contributions from your paycheck on an after-tax basis and deposits them in your account. While you must pay tax upfront on contributions, your withdrawals of deposits and earnings in retirement are entirely tax-free.
Can You Contribute to a 401(k) and an IRA in the Same Year?
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