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Understanding 401(k) account characteristics is important to maximize investment contributions and save enough money to fund your lifestyle in retirement. getty Investing in a 401(k) plan is one of the most effective options an investor has to plan for retirement. Tax-deferred growth and relatively high contribution limits enable individuals to amass a more substantial nest egg over their working years. Employer matching contributions, where applicable, represent an additional boost to retirement savings. The convenience of automated contributions and diversified investment options enhance the flexibility and ease of managing one’s retirement portfolio. For these reasons and more, the 401(k) plan is a powerful tool for building a secure and prosperous retirement future, and knowing the amount one can contribute per year to the account is important for maximizing retirement savings. 401(k) Contribution Basics A 401(k) account is an employer-sponsored savings plan that allows employees to invest for retirement while saving money on taxes. The plan allows employees to select a specific amount of money, called a contribution, which they can deduct from their paycheck each pay period. The Internal Revenue Service (IRS) determines the maximum amount of these contributions, which aims to govern the tax advantages associated with these contributions and the overall 401(k) plan structure to promote responsible retirement planning. Types Of Contributions There are two types of 401(k) contributions: traditional and Roth. Employees age 50 and older are subject to a higher contribution limit with either type of contribution. Traditional Contributions A traditional contribution refers to the standard contribution made to a 401(k) account. These contributions are made pre-tax, meaning they can reduce taxable income in the year they are made, offering potential tax advantages. Roth Contributions A Roth contribution allows employees to contribute post-tax income. Roth contributions don’t provide an immediate tax deduction, but qualified withdrawals, including earnings,…

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Filed under: News - @ November 22, 2023 8:14 pm