Taxes, 401(k) plans and IRAs are complicated. Here’s everything you need to master the fundamentals of both your personal taxes and retirement options.
The 401 and other defined-contribution plans have supplanted traditional pension plans over time. Under a 401, employers create a retirement plan in which employees can contribute a portion of their wages on a pretax basis, up to an amount determined by the IRS.
From 1980 through 2008, participation in pension plans fell from 38% to 20% of the country's workforce, while employees covered by defined-contribution plans jumped from 8% to 31%, according to the U.S. Bureau of Labor Statistics. In 2020, there were about 600,000 401 plans, with approximately 60 million Americans participating in them; it is one of the most popular retirement-savings options for U.S. workers.
When people think of retirement savings, in addition to 401 plans, IRAs likely come to mind. The key difference is that employers offer 401 plans whereas individuals open IRAs. There are pros and cons to both, but if you understand how to contribute and invest those contributions you can maximize your return ahead of your retirement in both a 401 and an IRA.
Watch the video above to learn about the fundamentals you need to master to better your financial picture regarding your personal taxes, IRAs and 401 plans.12:17 - How 401 Plans Work And Why They Killed Pensions Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox. For the Spanish version Dinero 101, click here.
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