Today on the Finance Flash Go! podcast, we are talking about the all-important 401(k) account!
What even is a 401(k) account?
A 401(k) investment account is probably the most common retirement investment account that employers offer. Additionally, self-employed individuals can open a solo 401(k).
In a 401(k), the money put in ($19,500 limit in 2020) is not yet taxed (pre-tax money). It then grows in the account and is taxed when the money is withdrawn in the future. This is advantageous because your effective tax rate during your peak earning years is very likely to higher than it will be in retirement when you will take the money out.
What about the employers?
Often, employers will contribute to your 401(k) as well. Commonly, a “match” is offered in which the employer will contribute a certain amount if you contribute to the 401k to a certain level. The maximum combined employer-employee contribution in 2020 is $57,000. If you are self-employed with a solo 401(k), don’t worry. You can contribute as both employer and employee.
The price for this tax advantage is that the money cannot be withdrawn prior to age 59½. Take the money out before that age and you will pay a 10% penalty in addition to the typical taxes.
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