Wednesday, 29 August 2012

What are the different types of 401k plan?

here are basically two types of 401k plan, based on the nature of the plan.
1) Traditional 401k plan
2) Roth

 Tax Rules for Traditional 401k Plan:
In this types of 401k plan wages are amount are contributed before taxes from each Payecheck, It is just like of deferred salary. Also, The Taxable income drops by the amount you contribute. Also, a participant has to pay the income taxes on the based of contribution and earning upon withdrawal.

Withdrawal rule for traditional 401k plan:
In this types of 401k plan, you can not withdraw your funds before age 59 ½ , But you can withdraw the amount at age 55, if you leave your employer at age 55 or older. If you decide to withdraw the fund in early, then you have to pay 10% penalty on top of the usual tax bill.

Tax rule for Roth 401k Plan.
In this types of plan contributions are made with money that is already been taxed. It means, You do not have to pay any taxes upon withdrawal.

Withdrawal rules for roth 401k plan:
This types of 401k plan has better flexibility than traditional 401k plan. It provides free access to your money as long as you have held the account for 5 years.

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