There are many retirement accounts available to employees in the country. Among the options is the 401(k) retirement savings plan, which has grown popular among many individuals today. The plan is sponsored by the employer and can come with tax and savings benefits for the employee’s future. But before one can reap the benefits of the 401(k) plan, it is important to understand and explore some of its aspects.

Working process of a 401(k) plan
The primary purpose of the 401(k) retirement plan sponsored by the employer is to help their employees plan for the future and gain tax benefits. When an employee opts for this plan, they select a percentage of their income to be taken out automatically from their paycheck and credited to their 401(k) account. They can also pick how these funds are allocated based on the investment options offered by the plan, like mutual fund options.

Types of 401(k) plans
Various types of 401(k) plans are available to employees in the country. But there are two main options that most individuals prefer because of their tax benefits. These include:

Traditional 401(k)
In this plan, an employee’s contribution is deducted from the gross income. So the money is sourced from the individual’s payroll before income taxes are deducted. The outcome of the deduction means that the employee’s taxable income is reduced by the total amount of contributions for the year. It can also be considered a tax deduction for the respective tax year. In a traditional 401(k) plan, no taxes are due on the amount contributed or the investment earnings. However, this is applicable until the employee withdraws the money, generally during retirement.

Roth 401(k)
In a Roth 401(k) retirement savings plan, the contribution is deducted from the employee’s after-tax income. The amount is transferred to the retirement account from an employee’s paycheck after the deduction of income taxes. The working process of this plan means that no tax deductions are made in the year of the contribution. Moreover, when the employee withdraws the funds during retirement, there are no additional taxes due on their contribution or the investment earnings.

Contribution limits
An employee and employer will only be able to make contributions to the account up to the dollar limit set by the Internal Revenue Service (IRS). The maximum amount an employee or employer may contribute is adjusted occasionally to account for inflation. The last update by the IRS indicated that employee contributions were capped at $20,500 per year for workers below 50. People aged 50 and over were also allowed to make a catch-up contribution.

Furthermore, there is another scenario where the employer also contributes to the account or if the employee chooses to make additional non-deductible after-tax contributions to their traditional 401(k) account. In such cases, a total employee-employer contribution is applicable for that particular year. Here, the total employee-employer contribution cannot exceed $61,000 per year for workers below 50 years of age. For those 50 and above, the limit is $67,500 if the catch-up contribution is included.

Investment tips
Since the money invested in a 401(k) plan is intended to help an individual in the future, they must first fully understand what the plan is about. However, there are times when certain terms or plans may not be easy to understand. The following tips may help one improve their investments with easy steps.

Determine contribution capabilities
The amount an individual can contribute to a retirement plan depends on their income, debt levels, and other financial commitments. But it is recommended to contribute as much as possible, ideally between 10% to 15% of their income, especially when they are young. This is because the sooner an individual starts investing, the easier it gets to reach their savings goal considering compound interest.

Increase contributions over time
The best way to improve investment saved up for retirement is to increase the contributions. One can boost contributions each time they get a raise or bonus, which will help them reach their goal faster.

Choose the right investment plans
One exposes themselves to risk whether they invest their money or keep their savings in cash. The best way to improve an investment is to determine how much money the person wants to put in stocks or in bonds. Each comes with its set of benefits. It is always advisable to research the best investment options by reading their pros and cons across multiple websites. To make the decision easier, one can pick a target-date fund to invest their money. Here, the employee needs to select a “target” retirement year and risk tolerance. The fund is then automatically allocated to a relevant asset. Hiring a financial advisor may also help one make better 401(k) investments.