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Choosing an Appropriate Option for Your Retirement
When you’re planning for your retirement, you discover a wide array of vehicles to help you plan for your golden years. Here are some of the most common types of retirement plans, with a discussion of the advantages and disadvantages.
Individual Retirement Accounts
The Individual Retirement Account (IRA) can take a number of different forms. It can be something that you do individually or through an employer (though it’s not available through every employer).
The IRAs that you fully fund on your own are typically referred to as the “traditional” IRA and the Roth IRA. A traditional IRA allows you to make a personal contribution to an IRA account and take a tax deduction in the year of the contribution. There are age limits…you can’t contribute to a traditional IRA after the age of 70 1/2—and you must start taking distributions at age 70 1/2. When you start taking distributions, you’ll pay taxes at your tax rate in the year you receive the money.
A Roth IRA, on the other hand, provides no tax benefit at the time of contribution, but allows you to withdraw funds tax-free. There are no limits as to when you can contribute and you don’t have to take distributions during your lifetime. You can pass your Roth IRA to subsequent generations and they will enjoy the same tax benefits.
Both the traditional and the Roth IRAs have income limits. With the traditional IRA, you’ll lose the deduction if you exceed the limit. With a Roth IRA, you’ll be prohibited from contributing if you exceed the income limit.
If your initial contribution was to a traditional IRA, you can always convert to a Roth IRA, pay the taxes and take all future distributions on a tax free basis.
If you are self-employed without employees, you can set up a unique form of an IRA known as a SEP IRA. It’s similar to the traditional IRA, but has a much higher annual contribution limit. For 2018, you can contribute up to 25% of your gross annual salary or 20% of your net adjusted annual self-employment income, up to a maximum of $55,000.
There’s another IRA plan that’s available to employees—the SIMPLE (Savings Incentive Match for Employees) IRA. It’s ideal for small companies and works very much like a 401(k), with contributions coming from pre-tax income.
401(k) Accounts
A 401(k) is a form of employee benefit similar to an IRA, where you are allowed to make contributions on a pre-tax basis, and where all growth in your retirement account is tax-deferred (you don’t pay taxes until you withdraw funds). One of the significant benefits of contributing to a 401(k)—it will lower your taxable income, as you’ll be taxed on your income less your contributions. In addition, many employers who offer a 401(k) also offer some type of match to your contribution, typically up to a certain percentage of your income.
As with IRAs, there are two types of 401(k)s—the traditional and the Roth 401(k). The differences are the same as with IRAs—a Roth IRA involves no immediate tax benefit, but allows you to withdraw tax-free.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA.
Contact The Pinnacle Financial Group
At The Pinnacle Financial Group, we’ve provided professional risk management advice to individuals and businesses in New York and Connecticut for two decades. We understand the critical role investment planning plays in your financial future. We’ll carefully explain your options and the different strategies available to you, so that you can make appropriate decisions for you and your loved ones.
To schedule a free initial consultation, call our offices at 516-763-9700 or complete the form provided below.
