When it comes to your future, it’s normal for us, as human beings, to get anxious and be a little freaked out about what we are going to be doing in 20 years from now or even to be stressed about tomorrow–especially money-wise. But, the good news is that there are some things in place–like the 401K and Roth accounts–that help you prepare for your future!
SO, WHAT THE HELL IS 401K AND ROTH ACCOUNTS?
A traditional 401K is when all of our money contributions go towards this account’s pre-tax dollars. What this will do is essentially lower your current income tax bill. On the other hand, a Roth account is usually recommended for younger individuals because they’re on lower income tax brackets. Your contributions towards your Roth are after-tax dollars. Your Roth account, just like a traditional 401K, will be tax-free at age 59 as long as you’ve had the account for more than five years.
Most people recommend that if you do get a choice, to opt for a Roth 401K since you already paid your taxes while you were contributing to it and at the time of your retirement you can enjoy the money without having to pay taxes at that point (instead of the other way around by having a traditional 401K).
Essentially what it means is this: Let’s say you have $1 million in your account when you retire. That’s a pretty nice stash! If you’ve got it in invested in a Roth 401K, that $1 million is yours. But, if you have $1 million is in a traditional 401K, you’ll pay taxes on your withdrawals in retirement. If you’re in the 22% tax bracket, that would mean $220,000 of that $1 million is going to taxes. That’s a hard pill to swallow, especially after you’ve worked so hard to build this amount.
NOW, HOW DO YOU SIGN UP FOR ANY OF THESE?
You can easily sign up for either of these through your employer, which is the most common way to do it. And bonus, almost every employer offers it and companies provide the services! Just ask your HR or benefits coordinator. There are also tons of free resources online and your bank can help you out too. Just ask and start saving!
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