Finance
5 common mistakes people make with their 401(k) plan
“A penny saved is a penny earned” is an age-old but evergreen proverb. And schemes like the 401(k) help one save strategically for their retirement. Provided by one’s employer, this scheme reduces one’s taxable income, but with the traditional 401(k), withdrawals from the fund after retirement are taxable. In contrast, with the Roth 401(k), there are tax reductions from the income but not from withdrawals. However, one should avoid certain mistakes as a 401(k ) user. Common mistakes people make Here are a few common mistakes people make with their 401(k) plan: 1. Not knowing about the different types of 401(k) accounts As mentioned before, the traditional and Roth 401(k) are the accounts one has under this scheme. In the traditional scheme, one isn’t taxed on their income, but the amount withdrawn after retirement is taxable. In contrast, in the case of Roth, one incurs taxes from their income but not during withdrawals. Each strategy has its pros and cons, and account holders should be aware of these before shortlisting either. 2. Withdrawing early from the 401(k) With 401(k) accounts, it’s always a good idea to be patient with the returns. If one withdraws before the age of 59.5, they face a 10% penalty, over and above the income tax on the distribution.
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