Retirement Planning Blog

One of the chief retirement plans available in the US, the 401k retirement plan provides retirees and older adults with high returns and financial stability. There are a number of 401k plans that you can choose from as per your needs and preferences. Among them, the Traditional 401k and the Roth 401k plans are the most preferred. Let us compare both the plans and evaluate the pros and cons.

Usually, both the traditional 401K accounts and the Roth 401k accounts are employer sponsored and so it the employee can decide whether to directly pay the contributions or whether they should be deferred to the account. Compared to the traditional ones, the Roth 401k plans are a blend of the traditional 401(k) and Roth IRA plan which makes it more useful for older adults who are dealing with any kind of investments.

In comparison to the traditional 401k , those who are 401k plan, those who covered under the Roth 401k can choose to make the contributions on a post-tax elective deferral basis. Usually, the combined elective deferrals of an employee can exceed $16,500 for a tax year if the employee is under the age of 50. One can contribute an added amount of $5,500 to the account if he or she is over the age of 50.

Compared to the traditional 401k account, the Roth version can be funded with after-tax dollars. In after tax dollars, the taxes for the funds are paid in the present year. An added benefit of Roth 401k is that it provides tax free distribution like the traditional version of the Roth plans.

The 401(k) plans are employer sponsored plans to make retirees and aged, secure and financially stable in the post retirement period. However, there are some do’s and don’ts of 401k plans which you need to take care of. Having some idea about the 401(k) plan will prevent such risks from taking place.

Here are some risks that are involved in the 401(k) plan:

Improper evaluation of returns: Although the 401(k) accounts provide you good benefits, you should never depend on them. While selecting your retirement plan, you need to evaluate the positives and the negative sides and decide accordingly. Most plans provide various options of investment, good company matching benefits and so on. While opting for the plans, try to look into the terms and conditions and decide accordingly.

Investing in the stocks: One of the common mistakes or risks that investors take is to depend more on stocks and mutual funds. Investing too much on the stock market can make you vulnerable to various market conditions. As such, you need to have diversified portfolio to maintain a balance between your profits and losses.

Forgetting the 401(k) matches: Another mistake involved in the 401(k) is not to take the matching contributions. Matching contributions can be very handy in providing you with more benefits. As such, if you employer provides you with the matching contributions, readily accept them. The matching contributions can be a great way to make you financially stable in the long run.

Risks of inflation: A major form of risk associated with the 401(k) retirement plan is inflation. The higher price level caused due to inflation can also increase the rate of interest. This can add to the expenses and can be a big problem for the aged and the retirees. One of the best options to prevent such inflation led losses is to invest in mortgages, immediate annuities, dividend paying stocks and so on.

In today’s economic down slum, it is important that you keep some funds to maintain a descent lifestyle. Well, now comes the important question: should you utilize the money or pay off the debts? You may be losing on vital funds and assets in the long run if you spend too much in paying the debts and do not invest. Proper debt management helps you to maintain a perfect balance between paying the debts and investments.

Proper debt management helps you to have an idea of the various cash flow conditions, the options of investments, the benefits and the risk factors and so on. If you thinking about investing some more funds, you need to have an idea of the tax cost of borrowing compared to the tax rates of investing returns. Your after tax returns can be more than the after-tax debt cost if you have a diversified portfolio.

Business persons may opt for investing the money in their business and not reduce the debts so much while retirees or older adults may pay off their debts first before opting for any type of investments.

To decide whether you need to invest first or pay off the debts, you need to take into account some vital factors such as your age, your source of earnings, the income, the rate of taxes applicable, the time limit of the debt and so on. If you do not want to take risks in the stock markets or investment channels, it is better that you pay your debts first.

Experts say that people who are still working should keep at least 6 months of cash in advance with them and should also try to have a debt-to-income ratio which should not exceed 25-33% in a month. Be it investing or paying off your debt, you should try to have this limit of money and the equation. Also take into account, the financial situation and the economic condition.