The Different Kinds of 401k Retirement Plans
The 401(k) is a retirement plan favored in the United States which allows taxpayers to put away funds for retirement while achieving favorable tax treatment of their contributions. But were you aware that there are many types of 401k plans, not only the traditional type, with which we are so familiar?
In 2006, Congress created the Roth 401k which works much like the Roth IRA of the same name. The plan was named for William Roth, the former senator from Delaware who sponsored the bill that brought the plan into law. How does a Roth IRA work? Instead of deducting your contributions on your current year’s taxes, you use after tax dollars and the contributions grow tax free. Better yet, unlike the traditional 401k plan, the Roth 401k has tax free withdrawals. That means that when you’re taking distributions on a Roth 401k, you won’t pay income taxes.
A Roth 401k plan can sometimes make sense in place of a traditional 401k plan if you expect your income (and therefore your marginal income tax rate) to increase with time. Anyway, your contributions will be taxed at some point, so inquire 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 the 457. These plans have arbitrary names and bear the name of the tax code that brought them into force. The main difference between a 457 and a traditional 401k plan is that the 457 is usually offered by government agencies, and allows distributions without penalty for early withdrawal of 10%. But that is not all.
But that’s not all. Another name convention alternative to a 401k is the 403(b). 403(b) plans are usually offered by public education organizations and non-profit organizations. Of course, we could go on and on — but these are the most common types of retirement funds offered by employers.
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.