A 401(k) is an employer sponsored retirement plan. In many instances, your employer will match your contributions; ask about this when establishing your account.
There are two main types of 401(k) accounts:
A Traditional 401(k) account is where the contributions are taken out of the paycheck pre-tax. This means, once you retire, you will have to pay taxes on all of your withdrawals. For this type of account, yearly contributions in 2018 are capped at $18,500 for those under 50 and $24,500 for those over 50.
A Roth 401(k) is where the contributions are taken out of the paycheck post-tax. So once you retire and start making withdrawals, you won’t owe any taxes on this money. For this type of account, yearly contributions in 2018 are also capped at $18,500 for those under 50 and $24,500 for those over 50.
An Individual Retirement Account (also called an IRA) is a retirement plan that is held at a financial institution. They can either be employer sponsored or by self-employed individuals. There are some accounts that require a person meet certain qualifications. For a Traditional IRA, contributions are capped at $5,500 in 2018 for those under 50 and $6,500 for those over. For a Roth IRA, contributions are also capped at $5,500 for those under 50 and $6,500 for those over. Simplified Employee Pension (SEP) IRAs are capped at $55,000 and a Simple IRA is capped at $12,500 for those under 50 and $15,500 for those over.
If you have 401(k) accounts with previous employers, consider rolling them over into an IRA.
A rollover can be completed in three easy steps: