Two of the most popular retirement plans for small business owners are the Roth 401(k) and the traditional 401(k). Your income during retirement can vary dramatically depending on which type of account you hold. Use this calculator to help you determine how to allocate your retirement savings between these two plans.
These are the key terms you should understand in order to make the most of this 401(k) calculator:
Employee retirement plans offer advantages for both employees and employers. From the employee’s standpoint, these plans facilitate effortless and automatic savings for retirement. The inclusion of tax benefits is a major incentive. Contributions are deducted on a pretax basis, which reduces the current taxable income burden. Furthermore, employer matches are often a lucrative source of “free” money for employees.
From the employer’s perspective, retirement plans are often critical for attracting and retaining employees. These plans play a crucial role in workforce planning, ensuring that employees are financially equipped for retirement. Vesting schedules tied to contribution matches provide yet another incentive for employees to remain with the company, further reducing turnover.
In a traditional 401(k), contributions are made with pretax dollars. This provides an immediate tax deduction. However, withdrawals during retirement are subject to income taxes. This structure can be advantageous for individuals expecting to be in a lower tax bracket during retirement.
On the other hand, Roth 401(k) contributions are made with after-tax dollars. While there is no immediate tax deduction, withdrawals are tax-free. This allows retirement savings to grow tax-free, which is particularly advantageous if you anticipate being in a higher tax bracket in the future.
Beyond tax treatment, withdrawal rules are also different for the two types of accounts. traditional 401(k) withdrawals before age 59½ may incur penalties and are subject to required minimum distributions (RMDs) starting at age 72. Roth 401(k) initial contributions can be withdrawn at any time tax-free, and there are no RMDs during the account holder’s lifetime. However, the earnings in a Roth 401(k) can be withdrawn only after age 59½.
When selecting a retirement plan provider for your business, businesses should prioritize competitive pricing and a comprehensive array of investment options. Look for essential features recommended by experts, such as the provider’s track record in managing administrative tasks, educational tools for retirement planning, convenient online access for employees, and no kickbacks from mutual fund companies.