Tag Archives: Retirement Plan

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!