I have a couple questions, now i live in australia so different from you guys and I'm wondering if you can tell me the difference between Roth, IRA an 401k acct (did I miss any?) are they mandatory or are they like savings accounts? I read all about them but don't understand them...Thanks
I have a question (s)
May 7th, 2021 at 03:26 am
May 7th, 2021 at 05:39 am 1620365979
401K accounts are sponsored by employers. They contract with someone to manage the program - deciding what funds to offer, provide the reporting, etc. The employer often matches employee contributions up to a certain percent, and pays the administration fees for the account services. They deduct contributions from paychecks based on how much the employee chooses to contribute. The employer contribution usually hast to ‘vest’, be in the account for a few years while the employee works there before the money belongs to the employee. There are different vesting rules by company.
IRA accounts are open directly by someone with either a bank or other financial institution. The individual chooses what they want to invest in and deposits money at whatever interval they choose. If there are administrative fees the individual often pays them.
Anyone with earned income or married to someone with earned income can deposit money in an IRA. The government sets limits on how much can be deposited each year. There is also a government set limit on how much you can deposit to a 401k. You can deposit to both, subject to certain income limits.
There are Tradirion and Roth IRAs and 401KS. The difference is on how the money is taxed.
In traditional plans, you don’t pay taxes on money you deposit in the account until you withdraw it. The money in the account grows tax free, but you pay taxes at withdrawal. Except under special circumstances, you cannot withdraw until you are 591/2 without paying taxes plus a penalty. After age 72, you are required to take distributions at a government determined rate. If you die, your heirs are taxed on the money and must withdraw it within ten years.
For Roth, you pay taxes on the money before you deposit it. The money in the account grows tax free, and you pay nothing in taxes when you withdraw it. You can withdraw money you deposited without penalty at any time. I don’t know if you pay taxes on earnings and/or a penalty if you withdraw early. You are not required to ever take distributions. If you die, your heirs are not taxed on the money in the account but must withdraw it within ten years.
Because the tax rate is graduated, you exude whether to use traditional or Roth based on whether you think your rate in retirement is higher than your current rate. Ideally, you contribute to Roth when you are starting out, traditional later. In retirement, you can take some money you have to pay taxes on up to say, the 12 percent bracket, and take Roth money and pay no taxes for anything else you need.
May 8th, 2021 at 10:11 pm 1620511868
All of the above: 401(k), Traditional IRA, and Roth IRA are optional accounts. The 401(k) is set up with an employer while the Traditional and Roth IRAs are set up by individuals.
Less than half of jobs actually offer a 401(k) or other employer-sponsored retirement plan. Employer-sponsored plans allow you to save more money than IRAs do. You can only contribute $6,000 a year to an IRA if you are under age 50 and $7,000 if you are over 50--and you must be working in order to contribute.
We also have Social Security, which is somewhat comparable to your superannuation plans in that both employers and employees contribute--each contributes 6.2% of an employee's income per year, so it is a lower rate than your superannuation contributions, and there is no option to contribute anything extra to Social Security--if you want to contribute above and beyond what Social Security offers, you need to do it through an employer sponsored plan like a 401(k) or through an IRA.
May 9th, 2021 at 04:20 am 1620534026
May 18th, 2021 at 12:40 am 1621298424