Читать книгу Retirement Planning For Dummies - Matthew Krantz - Страница 18

Those of you who were around in 1978 probably recall the debut of the Garfield comic strip. Another big milestone in 1978 was the end of production of the Volkswagen Beetle. But something far more important for retirement planning happened that year: The 401(k) was born.

The 401(k) is practically synonymous with retirement planning now because this plan is the predominant way most people save for retirement, especially those relatively new to the workforce. This popular retirement plan has steadily replaced the pension plan.

Employer-sponsored defined contribution plans are typically called 401(k)s. But they have close cousins at different employers. Employees at nonprofits access 403(b) plans, government workers have 457(b) plans, and some schools have 401(a) plans. The letters and numbers are different, but the plans are essentially the same as 401(k)s in terms of taxation.

As mentioned, pension plans are defined benefit plans. The plan sponsor, typically the employer, promises the retiree a certain monthly or annual income in retirement. In contrast, 401(k) plans are defined contribution plans. The only thing that’s set is how much will be contributed to the plan. Typically, employees make most of the contributions. Contributions for standard 401(k) plans are generally made by paycheck deductions using pre-tax dollars; I cover exceptions in Chapter 4. (When you contribute to a 401(k), you lower your tax bill.) Many employers then make additional contributions, usually a matching percentage of what the employee puts in.

The amount that you will get out of a defined contribution plan is not guaranteed. You can select how your money will be invested, as I describe in later chapters, but you can take out only what’s in the account. This is an important difference from defined benefit plans such as pensions.

Why is the traditional 401(k) so powerful? The company match, if available, is great, but the main benefit is the tax-deferred contribution. Suppose you earn $100,000 and elect to contribute $10,000 to your 401(k). The $10,000 would be taken from your paycheck and not immediately taxed. Assuming that you're in the 24 percent tax bracket, you would not pay the $2,400 in tax that would have ordinarily been due the year the money was earned. Instead, the money is taxable in the future when you withdraw it in retirement. This deferral is a powerful tool in retirement planning.

Contributions to a 401(k) offer tax deferral, not tax elimination. With most traditional retirement plans, you don't pay taxes now, but you do pay taxes eventually. The idea, though, is that when you pay taxes down the road, when you’re not working, your tax rate will be lower.