The Unique Types of 401k Plans You Need to Know About
The 401 (k) is a type of retirement fund unique to the United States which allows taxpayers to set aside money for retirement while achieving favorable tax treatment of their contributions. But did you know that there are several types of 401ks, not only the traditional type that we know so well?
In 2006, Congress created the Roth 401k, which acts much like the Roth IRA of the same name. The plan was named after William Roth, former senator from Delaware, who sponsored the bill which introduced this plan. How does a Roth IRA operate? Instead of deducting the contributions you make to your plan this year, you pay income taxes on your contributions this year and not later on down the road. Just like the traditional 401k plan, investments in Roth 401k plans grow tax free.
A Roth 401k plan can sometimes make sense instead of a traditional 401k plan if you expect your income (and marginal income tax) to increase over time. However, your contributions are going to be taxed at a certain point, so it's sort of up to you to figure out which plan makes the best sense for you. Also, it's important to check with your plan administrator to see what kind of plans are offered. Roth 401k are generally less common than the traditional version.
What if you work in the public sector? Well, there is also a variant of a 401k plan called 457. These plans have peculiar names driven by the tax code that wrote them into effect. The main difference between a 457 and a traditional 401k plan is that the 457 is usually offered by government agencies, and allows distribution without penalty for early withdrawal of 10%. But that's not all.
Another alternative to a naming convention that 401k is a 403 (b). 403 (b) plans are generally offered by public education agencies and nonprofit organizations. So there you have it. There are all kinds of 401k funds there!
Visit Christopher Butters' blog to get motivated to max out your 2011 401k or other retirement plan. Learn how to position yourself for retirement planning success by making 401k max contributions.
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