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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 $2,000 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. Be sure to ask him or her about the Roth IRA - an exciting new option. (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 recently introduced a new retirement option-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.)
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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.
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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).
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| How
Much Can I Contribute? |
Up to $2,000 per year (or $4,000
if you and your spouse file a joint tax return).
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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. |
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.)
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Plans Offered Through Businesses and Business Owners
401(k)
Plan: This option allows you to defer taxes on annual contributions of as much as 20% of your salary (up to a maximum of $10,500 indexed for 2000*). Some employers even match a percentage of your contribution, in which case the limits for the 2000 tax year are up to 25% of your total annual compensation (to a maximum of $30,000*).
Simplified
Employee Pension Plan (SEP-IRA):
Simplified Employee Pension Plan (SEP-IRA): This plan allows your employer to contribute as much as 15% of your salary annually (up to a maximum of $24,000 for the 2000 tax year*) toward your retirement. Only your employer contributes to this plan.
Savings
Incentive Match Plan for Employees IRA (SIMPLE-IRA):The SIMPLE-IRA is a tax-deferred retirement plan that owners of small businesses (those with fewer than 100 employees) can set up, provided that their business does not already have a retirement plan. The employer and employees both contribute to the plan. For the 1998 tax year, employees can contribute up to $6,000* annually, plus their employer's contribution. Taxes are deferred on contributions to a SIMPLE-IRA and any earnings the account generates until the employee begins to withdraw money in retirement, at which time the distributions are taxed as ordinary income.
Profit-Sharing
Plan:Through this plan, companies can contribute up to $30,000* or 15% of each employee's salary each year toward their retirement.
Money
Purchase Pension Plan:This plan is similar to a profit-sharing plan, with a few differences. Employers can contribute up to $30,000* or 25% of each employee's salary per year.
Defined
Benefit Plan:: This option allows employers to contribute money on a quarterly basis toward a predetermined retirement benefit for each employee of up to $90,000* per year or 100% of the employee's salary (whichever is lower).
*Note that these limits can change from one tax year to the next.
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