What is a 401(k) plan?
A 401(k) is a savings and investing plan for retirement offered by employers, that gives employees a tax break on money they contribute. It works by automatically withdrawing contributions from employee paychecks each month and investing the funds wherever the employee chooses.
There are two types: traditional and Roth 401(k).
What are the key differences between Traditional and Roth 401(k) plans?
The most notable difference between a traditional 401(k) and Roth 401(k) is how the money contributed is taxed. We will outline the key differences below:
1. Traditional 401(k)
A traditional 401(k) plan is a pre-tax savings account. This means that when you invest in one, your contributions go in before they’re taxed which ultimately makes your taxable income lower.
2. Roth 401(k)
A Roth 401(k) plan is a post-tax retirement savings account, which differs from traditional plans as contributions are taxed before they enter your account.
The Pros & Cons of Traditional and Roth 401k) plans
To understand the potential advantages and disadvantages, we first need to look at the key differences between the two types of 401(k) plans.
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Contribution Limits
There are a few limits on the contributions that can be made by an employee or employer, and the maximum amounts are adjusted periodically to account for inflation.
For example – in 2021, the annual limit on employee contributions is $19.5k per year for workers aged 49 and below. But in 2022, the limit rose to $20.5k per year. It’s worth noting that anyone aged 50 and above can make a catch-up contribution of $6.5k in 2021 and 2022.
Employee and Employer Contribution Amounts
If an employer wants to also contribute, or the employee wants to make additional after-tax contributions to their traditional 401(k) plans, there is a total employee-and-employer contribution amount for the year.
a) 2021
For employees under 50, the total employee-and-employer contribution amount stops at $58k, or 100% of employee compensation (whichever is the lower amount). However, if the catch-up contribution is included for those who are 50 and over, the limit is capped at $64.5k.
b) 2022
For workers who are under 50 years old, the total employee-employer contributions cannot exceed $61k per year. If you include the catch-up contribution for those 50 and over, the limit is capped at $67.5k.
Rolling Over Your 401(k) Plan
Do you have a 401(k) with a former employer? Our team of dedicated advisors are here to help guide you through the complex transfer process. You can read more about transferring your 401(k) into an IRA here.
If you are interested in learning more about 401(k) rollovers, then please contact us directly at [email protected] or call us directly:
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New York NY,
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