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Once you've decided
to plan for your future, the next step is to decide which retirement vehicle
is right for you. There are a variety of options, including several tax-advantaged
plans. You can defer paying taxes on the money you contribute to these
plans for years or even decades. You may be in a lower tax bracket when
you begin withdrawing money in retirement — potentially meaning significant
tax savings for you!
Plans for Individuals
Individual
Retirement Account (IRA): One
of the most popular retirement plans, an IRA allows you to defer taxes
on contributions of up to $4,000 or 100% of your earned income (whichever
is less) each calendar year, if you qualify. Because the laws governing
IRAs are somewhat complex and change frequently, we encourage you to
consult with your tax advisor to find out which choice is right for
you. (See the section below.)
Rollover
IRA (Direct and 60-day):
This option allows you to roll over eligible distributions from an existing
IRA or other qualified retirement plan into a new account. If you transfer
funds directly from one institution to another or roll over your funds
within 60 days, you will owe no taxes.
403(b)
Custodial Account:
A more specialized option for employees of educational, scientific,
charitable, or religious organizations, a 403(b) plan allows you to
defer taxes on a portion of your salary for retirement purposes.
Traditional
IRA or Roth IRA? Congress introduced the Roth IRA–beginning in the 1998 tax
year. The main difference between a Roth IRA and a Traditional IRA is
that contributions to a Roth IRA are not tax deductible, but qualified
distributions are tax-free. (With a Traditional IRA, it's the other
way around: contributions may not be taxed on the way in, but they are
taxed on the way out, when you withdraw money in retirement.)
| |
Traditional
IRA |
Roth
IRA |
| What
Are the Tax Advantages? |
Contributions to a Traditional IRA
may be tax deductible, depending on your income and whether you
already participate in your company's retirement plan. The IRS
will tax qualified withdrawals from your account as ordinary income.
|
Contributions to a Roth
IRA are not tax deductible, but qualified withdrawals are
tax free if you have reached the age of 59 1/2 and if the account
has been open for five years or more. (Other qualified distributions
may apply.) |
| Who
Qualifies? |
Anyone under the age
of 70 1/2 with earned income for the year. There are some
restrictions on contributions, depending on the participants income. |
Individuals of any age with earned
income, as long as their modified adjusted gross income (AGI)
is below $110,000 (unmarried individual tax filers) or $160,000
(joint filers). Some restrictions on AGIs of more than $95,000
(unmarried single filers) or $150,000 (joint filers).
|
| How
Much Can I Contribute? |
Up to $4,000 per year (or $8,000
if you and your spouse file a joint tax return).
|
Same as Traditional IRA |
| When
Can I Begin Withdrawing Money? |
Age 59 1/2. Withdrawals
made prior to that may be subject to a 10% penalty. You can, however,
make penalty-free withdrawals prior to reaching age 59 1/2 to buy
your first home or to pay for higher-education expenses. Other qualified
distributions may apply. |
Distributions do not have
to be taken at age 70 1/2.
Same as Traditional IRA,
but if the account has been open for five years:
-Withdrawals prior to age 59 1/2
are tax-free and penalty-free when used to buy a first home purchase.
-Withdrawals after age 59 1/2 are
tax-free and penalty-free.
(Other qualified distributions may apply.)
|
Plans Offered Through Businesses and Business Owners
401(k)
Plan: 401(k) Plan:
This option allows for you to defer taxes on annual contributions of as much as 25% of your salary (up to a maximum of $15,500 for 2007*). Some employers even match a percentage of your contribution, in which case the limits for the 2007 tax year are up to 25% of your total annual compensation (to a maximum of $45,000).
Simplified
Employee Pension Plan (SEP-IRA):
This plan allows your employer to contribute as much as 25% of your salary (up to a maximum of $45,000 for the 2007 tax year*) toward your retirement. Only your employer contributes to this plan.
*Note that these
limits can change from one tax year to the next.
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