Retirement Planning Guide For 401k’s and IRA’s

Photo Credit: http://www.moneychoice.org/faq/how-do-you-withdraw-from-a-retirement-plan/
Photo Credit: http://www.moneychoice.org/faq/how-do-you-withdraw-from-a-retirement-plan/

Below is a guide we put together for you to use in assessing the tax implications of different retirement plans, along with the benefits and negatives of each………

401K’S Benefits:

  • Employer matching
  • Higher contribution levels ($18,000 for under 50…$24k for over 50)
  • Contributions are pre-tax (or “tax deferred”)…lower taxable income
  • No income limits for contributions other than earned income must be greater than contribution

 

Negatives:

  • Normal distributions taxed as income
  • Forced distributions at 70 ½
  • Limited to employer fund availability

 

Traditional IRA’s Benefits:

  • Contributions are pre-tax (or “tax deferred”)…lower taxable income
  • You can pick the funds (not limited by employer’s fund managers)
  • No income limits for contributions other than earned income must be greater than contribution

 

Negatives:

  • Normal distributions taxed as income
  • Forced distributions at 70 ½
  • Contribution limited to $5,500 for under 50…$6,500 over 50 (earned income must be > contribution)
  • Contributions may be limited by other contributions (ie-401k)
  • No employer matching

 

Roth IRA’s Benefits:

  • Normal distributions tax-free (contributions & growth)…provides hedge against higher future tax rates
  • No forced distribution at 70 ½
  • You can pick the funds (not limited by employer’s fund managers)

 

Negatives:

  • Contributions are made post-tax so no upfront tax benefit
  • Contribution limited to $5,500 for under 50…$6,500 over 50 (earned income must be > contribution)
  • Income limitations (AGI) of $116-131k for Single and $183-193k for MFJ
  • Contributions may be limited by other contributions (ie-401k)
  • No employer matching

 

Strategy: 401k/Roth IRA Contributions

  • Contribute to your 401k up to employer match amount; and then contribute to a Roth IRA.
  • Always have 6-12 month Safety Fund before contributing to retirement plans
  • Need to plan for unexpected expenses (car maintenance, house repairs, etc.)
  • Need to be able to access penalty-free cash at drop of hat for job loss, health problems, etc.

 

Do you agree with the strategies mentioned regarding 401k/Roth IRA Contributions? Please leave your comments below. We would love your input!

About

Chad Peshke is an experienced Financial Services Provider specializing in tax preparation, home loans and personal finance coaching. He holds a Bachelors Degree in Economics from the University of California in Santa Barbara and is licensed in tax preparation, loan origination, real estate and insurance. View all posts

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