ABCs of Retirement

RetireIRA, 401(k), 403(b). What does all of this gibberish mean? Preparing for retirement can be very confusing. Some retirement options are tax deductible and some grow tax-free. The number of retirement options grows all the time. What is the difference and which option is actually right for you? To save you time I have compiled a list of the different types of retirement plans and what each offers.

Most Popular

401(k)/403(b) For many this is the easiest plan to participate in. The money is withheld during your payroll deduction and you can save up to $18,000 of your pre-tax income ($24,000 if age 50 or older). If you leave your job you are able to roll this into another 401(k) or an IRA.

401(k) is traditionally offered at for-profit companies, while 403(b) is offered at non-profits and for teachers.

IRA Anybody is able to contribute up to $5,500 towards an IRA ($6,500 if you are over age 50). In an IRA the money grows tax-free, however, when you withdraw money, the tax will be applied.

IRA contributions are tax deductible under certain conditions:

Single Filer With a Retirement Plan at Work

  • If your household income is $61,000 or below your contributions are fully deductible.
  • If your household income is between $61,000 and $71,000 your contributions are partially deductible.
  • If your household income is $71,000 or above your contributions are not deductible.

Single Filer Without a Retirement Plan at Work

  • Your contributions are fully deductible regardless of your income

Joint Filer Where Both Individuals Have a Retirement Plan at Work

  • If your household income is $98,000 or below your contributions are fully deductible.
  • If your household income is between $98,000 and $118,000 your contributions are partially deductible.
  • If your household income is $118,000 or above your contributions are not deductible.

Joint Filer Where Only One Individual Has a Retirement Plan at Work

  • If your household income is $184,000 or below your contributions are fully deductible.
  • If your household income is between $184,000 and $194,000 your contributions are partially deductible.
  • If your household income is $194,000 or above your contributions are not deductible.

Joint Filer Where Neither Individual Has a Retirement Plan at Work

  • Your contributions are fully deductible regardless of your income.

You are able to contribute to both a 401(k) and an IRA.

Roth IRA Anybody is able to contribute up to $5,500 towards a Roth IRA ($6,500 if you are over age 50).

Contributions are after-tax dollars and are not tax deductible like a traditional IRA. However, the money you earn grows tax-free and you do not pay taxes to withdraw money after you reach age 59 ½.

Additionally, unlike a traditional IRA there is not a mandatory withdrawal at age 70. Furthermore, you can withdraw your contributions (but not earnings) at any time without penalty or paying taxes.

To contribute to a Roth IRA your annual income must be less than $131,000 (single filer) or $193,000 (joint filers). If your income is greater than $117,000 (single filer) or $184,000 (joint filers) your allowed contribution is reduced.

You can contribute to both a Roth IRA and a traditional IRA but the contribution limits are applied to the total contributions.

Least Popular

Solo 401(k) This is an individual 401(k) designed for a sole proprietor to make contributions as both the employee and employer. Contributions can be up to $53,000 ($59,000 if over age 50)
SEP IRA SEP is a simplified employee pension and is for self-employed or small business owners. An employer can contribute up to 25% of their income or $53,000, whichever is less.

An SEP IRA is easier to set up than a Solo 401(k), however, if the business has employees the employer must contribute the same amount for all employees who meet certain requirements.

Simple IRA This is designed for small employers (less than 100 employees) to set up IRAs. Employers must either match employee contributions or make an unmatched contribution.

An employee can contribute up to $12,500 ($15,500 if over age 50)

Investing This is not a “real” retirement plan but rather a “go-it-alone” plan. This does not have any tax benefits and is less safe than a using a “real” retirement plan.

In this plan you invest your money into stocks or commodities (gold, silver, etc.). You can either manage your own investment portfolio, if you have the knowledge, or hire a broker.

When you sell an investment at a profit you are required to pay capital gains tax. However, if done properly this can have tremendous rewards.

Investing can be very rocky, therefore, whenever someone asks me about investing, I always say never put any money into an investment that you are not willing to flush down the toilet.

*All information is as of 2016

Your Financial Freedom Partner,
Joel Parker