For many retired Americans, the Social Security System is their primary source of support after they've left the working world behind. Unfortunately, for a number of reasons, many seniors find the support they receive from Social Security to be inadequate. In some cases it can be very difficult to live on that money alone, causing many seniors to continue working even after they 'retire'.
Due to the difficulties seniors have had with Social Security, workers have been increasingly concerned with having enough money when they retire. Over the past few decades, it has become more and more common for employers to establish 401(k) and other types of retirement accounts for their employees, which they can then contribute to.
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A 401(k) account is ordinarily an employer-sponsored savings account, meaning that the employer with whom the employee establishes the account can choose to match the employee's contribution in part or whole. In other words, for every dollar you put into your 401(k), your employer might match it in part or dollar-for-dollar. Although this doesn't always happen, such a 401(k) can be an incentive benefit for employees.
One of the main advantages of a 401(k) account, other than the employee sponsorship, is that the income put into it is tax-deferred. Every dollar an employee chooses to defer into their 401(k) is transferred into that account without tax being applied, unlike putting part of a paycheck (which is income after taxes) in a savings account.
In place of or in addition to 401(k)s and other savings accounts, some people also choose to open IRAs, or Individual Retirement Accounts. One advantage of an IRA is that it offers a great deal of flexibility, due to being set up independently by individuals. Although early withdrawals from IRAs are often penalized (they are, after all, retirement accounts), the restrictions are not nearly as severe as with 401(k)s.
IRAs and 401(k)s are treated very similarly under tax law. In both cases, funds put into the account must be cash or equivalent to cash, and the income is generally not taxed at the time it's put in the account. When the account holder retires and begins withdrawing from the accounts, with both traditional IRAs and traditional 401(k)s, the funds are then taxed as income.
Two of the main differences between IRAs and 401(k)s are that IRAs are established independently of employers, and IRAs tend to be funded by cash amount rather than percentage of income, as with 401(k)s. In other words, money put into a 401(k) is a percentage of the employee's income, while IRAs are funded with dollar amounts.
Both 401(k)s and IRAs are bankruptcy exempt. Even if your bankruptcy required liquidation of assets, your retirement accounts cannot be touched by any creditor. If you are considering bankruptcy, the experienced Boca Raton bankruptcy lawyers of Eric N. Klein & Associates, PA can help. Contact them today for more information.
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