With pension plans increasingly rare, most people turn to employer-sponsored 401(k) plans to secure their retirement.
These plans, administered not by the company, but by large investment and financial management firms, are highly secure. Some companies also offer a percentage of matching contributions by the employer.
But there is more than one kind of 401(k).
The first is type is a 401(k) program that defers taxes on contributions and earnings until you make withdrawals at retirement. At that time, you can elect to pay tax on the withdrawals.
The second type is the Roth version. With the Roth version, your contributions are made with after-tax money. That means when you hit retirement age, you can withdraw your savings with no tax hit.
Some financial gurus claim the Roth 401(k) is the best choice because you can pay taxes on your money slowly. According to Dave Ramsey, you’ll avoid potentially higher tax rates in the future and access your savings free and clear. It’s a historical fact the United States has traditionally had FAR higher tax rates, and many experts looks at the current trends and claim higher taxes WILL be here again at some point. In that light, the Roth makes a lot of sense. Whatever plan you choose, the key is to start making contributions early and make them consistently throughout your working life