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

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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!