investor-learn-taxadvantaged

Learn and Plan:
Tax-Advantaged Retirement Plans

Individual Retirement Accounts (IRAs) and workplace retirement plans, such as SEP and Simple IRAs, 401(k) and 403(b), enable you to save for retirement and get tax benefits.

  • Traditional IRAs and Roth IRAs are set up and funded by individuals.
  • SEP-IRAs and SIMPLE-IRAs are set up by sole proprietors, partners or owners of a small business.
  • Workplace retirement plans, such as 401(k) and 403(b) are set up by employers. Depending on the type of plan, companies may offer an “employer match,” contributing an amount equal to your contribution up to a company set-maximum.

The most common types of IRAs are Traditional and Roth

With Traditional IRAs your contributions are generally tax deductible. You don’t pay taxes on the money you put into your IRA account when you make the contribution. But you do pay taxes on the money when you withdraw it after retirement.

With Roth IRAs you pay taxes on the money when you make the contribution. But you don’t generally pay taxes on the money when you withdraw it after retirement.

Should you choose a Traditional IRA or a Roth IRA?

Consider the Roth IRA if:

  • You think you’ll be able to contribute the maximum allowable amount each year.
  • You expect to be in a higher tax bracket in retirement than in the year you make the contribution.
  • Your contributions to a Traditional IRA won't be tax deductible because you are covered by an employer plan and your adjusted gross income is above the specified limit.
  • You don't want to be locked in to taking distributions from the account during your lifetime. (And if you'd like the possibility of distributions to your heirs being tax-free.)
  • You'd like to help ensure your heirs have maximum flexibility with account assets.

Consider the Traditional IRA if:

  • You expect to be in a lower tax bracket when you retire than when you make the contribution.

Compare Roth IRA and Traditional IRAs.

Small Business Plans: SEP-IRAs and SIMPLE-IRAs

SEP-IRAs

If you’re a sole proprietor, partner, or owner of a small business, you may choose to set up a Simplified Employee Pension Plan (SEP) IRA, a powerful retirement-savings vehicle. You and all eligible employees establish separate SEP-IRA accounts to receive contributions.You may make an annual contribution of up to 25% of the employee’s compensation up to a defined compensation cap. No annual contribution is required. The employer’s contributions are tax deductible in the year the contribution is made, but funds are taxed when the money is withdrawn from the account after retirement.

Simple IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is primarily a retirement plan for businesses with 100 or fewer employees who do not have another employer-sponsored plan. To be eligible to participate in the plan, employees must have earned at least $5,000 a year in the past two years and be expected to earn at least $5,000 in the current year.

As an employer, you have two options for making contributions to a SIMPLE IRA.

  1. You can match each participant's contributions, dollar-for-dollar, up to 3% of the participant's compensation but no more than $11,500 for 2009.
  2. You can contribute 2% of each eligible participant’s compensation (up to $245,000) annually, up to a maximum of $4,900 for 2009, regardless of whether the participant elects to contribute.

Defined Contribution Plans: 401(k) and 403b

If your company offers a 401(k) Plan [or a 403(b) if your employee is a government or nonprofit organization], you can contribute pretax dollars. Many plans offer a variety of investment options including stocks, bonds, mutual funds, and company stock.Your employer may match a percentage of your contribution. Your 401(k) savings grow tax deferred until retirement.

Since many companies no longer offer traditional pension plans, defined contribution plans may be the only retirement savings options you have though work.

These plans have many benefits, and most financial advisors encourage their clients to contribute the maximum amount.

  • Your contributions are made with pre-tax dollars and can be made through payroll deduction.
  • Companies may offer an "employer match," contributing an amount equal to your contribution up to a company-set maximum.
  • Any account earnings grow tax-deferred, so your money may grow more quickly than it would in a taxable account.
  • Most plans offer an array of investment options, and you decide where your contributions go.
  • Account assets are yours and are portable. When you leave your job, you may decide to roll over the money into a new employer's plan or into a Rollover IRA.
  • In addition to offering high annual contribution limits, the plans permit additional “catch up” contributions for people age 50 and older.

Compare Roth IRAs and Traditional IRAs

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