Americans have two significant opportunities created by the constitution to enable them to save money for retirement purposes. The 401 (K)s refer to the pretax 401 (k) and a post-tax Roth 401 (K) which have different features and strengths to enable people to make savings in different financial conditions (Brown, Saad-Lessler, & Oakley, 2018). The Roth 401 (k) can only be funded by post-tax money which is more strenuous because it reduces the overall money available for spending but ensures that those who make contributions will not pay taxes for the same money in the future(Brown et al., 2018). The 401 (K) is tax-free when making the payments, but the government will deduct the taxes when withdrawing the money (Brown et al., 2018). However, holding the savings balance for five years renders the Roth 401 (K) tax-free and one has to be 59 and ½ years. Those that withdraw early in the after-tax dollars incur taxes and a penalty and those that do not contribute directly bear considerably smaller tax portion.

From a personal perspective, understanding the 401(K)s is very important in one’s retirement benefits growth. In both scenarios, it is essential to be aware that retirement savings incur taxes which can either be instituted up front when making the saving or when withdrawing the savings. The best approach of saving is the Roth 401 (K) which is a post-tax approach where one can get tax free retirement savings for saving regularly for five years without withdrawals (Brown et al., 2018). This method shows that it is best to make retirement benefits a lifetime commitment and avoiding early withdrawals until one is above 60 years of age where one can earn tax-free withdrawals (Turner, 1999). For instance, making Roth 401 (K) contributions regularly for more than five years and withdrawing when one is 60 years makes the savings tax free. When one earns $20,000 and has a 10% tax and has $5000 pension plan, one should make the savings before the tax is instituted making the taxable income $15000. However, in a post-tax scenario, one pays the 10% tax on the gross income of $20000 and makes savings on the remaining amount after the tax making the savings tax free when withdrawing.

The post-tax plan is the best approach because it reduces the overall tax burden which can increase over time due to changing rates due to inflation. The employer benefits by contributing to the employer retirement benefit by acquiring tax deductions (Turner, 1999). When employers make a 50% contribution of the employee retirement benefit plan, they are entitled to a 12.5% tax credit. The retirement plans in this chapter will play an essential role in informing my future retirement benefits contributions by ensuring that I chose a retirement benefit plan with less tax liability and if I am a manager or an entrepreneur I will contribute to my employee retirement benefit plan to get a tax credit.

References

Brown, J. E., Saad-Lessler, J., & Oakley, D. (2018). Retirement in America. National Institute on Retirement Security. Retrieved from https://www.nirsonline.org/wp-content/uploads/2018/09/FINAL-Report-.pdf

Turner, J. A. (1999). Pensions, tax treatment. The Encyclopedia of Taxation and Tax Policy. Retrieved from https://www.urban.org/sites/default/files/publication/69531/1000541-Pensions-Tax-Treatment.PDF

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