If your regular day job has a 401(k) program, you’ll do well to take advantage of that savings opportunity. 401(k) retirement accounts offer tax advantages to individuals who contribute a portion of their paycheck to that investment account. What should you know about contributing to your 401(k)? Pango Financial is here to offer a few pointers.
Main Types of 401(k)s
There are a couple of distinct types of 401(k) retirement accounts, each with its own advantages.
A traditional 401(k) deducts your contributions from gross, or pre-tax, income. This means it reduces your taxable income, depending on how much you contributed. You don’t pay taxes on your 401(k) contributions until you withdraw those funds.
Meanwhile, a Roth 401(k) deducts your contributions from your net, or after-tax, income. You don’t get tax deductions on your contributions. And when you withdraw the funds, your contributions and investment earnings aren’t subject to taxes. However, if you want to use your 401(k) for an ROBS or other business funding services, you should know that Roth 401(k)s aren’t eligible for rollovers.
How Contributions Work
Setting up your 401(k) is easy. Enlist the help of your workplace’s human resources department to guide you through the paperwork. Select the amount you want to contribute from each paycheck, and choose from a variety of investment funds as a destination for your contributions.
How Much To Contribute
The IRS does place a limit on how much money you’re allowed to contribute to your 401(k), and that number changes year after year. In 2023, the limit for total employer and employee contributions is $66,000 a year or $73,500 for individuals aged 50 and older.
If your employer offers contribution matching up to a certain amount, take advantage of that opportunity as best you can. Otherwise, you may be leaving valuable funds on the table!
Do you have the opportunity to contribute to a 401(k) at your day job? Here’s what you need to know about that opportunity: seize it! Start contributing to your retirement early on, and by the time you reach retirement age, you’ll have a healthy nest egg for your future.
Thinking about using your 401(k) or another investment account to start your own business? Head over to Pango Financial’s funding solutions tool to examine the financing options at your disposal.