Individual retirement savings plans have tax benefits that make them attractive ways to save for retirement on your own, either in addition to an employer plan or when you’re not covered by such a plan. To be eligible to contribute, you must have earned income. Alimony counts as earned income. While you can have more than one individual IRA account, and even more than one type of account, your total contributions to all of your individual accounts cannot exceed the annual contribution limit or the amount that you earn in one year.
In exchange for receiving tax benefits by contributing to an individual plan, you must follow specific rules on how much you put aside each year and, in some cases, how you take money out. You must also take the initiative to set up and contribute to these plans on your own. But you have the right to choose where to open your account and which investments to make.
Product
Who Can Use It
Maximum Contribution
Withdrawal Rules
Tax Rules
Portability
Comments
Deductible Traditional IRA
Anyone who earns income, but not after age 70 ½
Spousal IRAs for non-working spouses
$5,000 for 2010, plus $1,000 catch-up if 50 or older
Before 59 ½, taxes and 10% tax penalty due on most withdrawals
Must start minimum required distributions (MRDs) at 70 ½
Earnings and contributions taxed at regular income tax rate at withdrawal
Can deduct full contribution for 2010 if modified adjusted gross income (MAGI) is $55,000 or less as a single tax-filer or $89,000 or less as joint filer
Deduction phases out for 2010 as MAGI approaches $65,000 as a single tax-filer or $109,000 as a joint tax filer
Can roll over to another IRA or employer plan that accepts rollovers
Can convert to Roth IRA, but must pay taxes due
Deductible contributions mean immediate tax savings
Income limits affect amount that is deductible
No loans
Non-deductible
Traditional IRA
Anyone who earns income, but not after age 70 ½
Spousal IRAs for non-working spouses
$5,000 for 2010 plus $1,000 catch-up if 50 or older
Before 59 ½, taxes and 10% tax penalty due on most withdrawals
Must start MRDs by 70 ½
Earnings but not contributions taxed at regular income tax rate at withdrawal
Can roll over to another IRA
May qualify to convert to Roth IRA, but must pay taxes due
Contributions never tax deductible
No loans
Roth IRA
Anyone who earns income and, for 2010, has a MAGI up to $120,000 as a single tax-filer or $176,000 as a joint filer
Spousal IRAs for non-working spouses
$5,000 for 2010 plus $1,000 catch-up if 50 or older
For 2010, the ability to contribute decreases as MAGI rises from $105,000 to $120,000 for single filers and from $166,000 to $176,000 for joint filers
Before 59 ½, taxes and 10% tax penalty due on most withdrawals
Up to $10,000 in earnings may be withdrawn tax free to buy first home
No tax on withdrawals if at least 59 ½ and account has been open at least 5 years
Can roll over to another Roth IRA
No required withdrawals
No age limit on contributions if still earning
Income limits affect eligibility to contribute
Contributions never tax-deductible
No loans
Contributions may be withdrawn at any time without penalty
Table #2: Employer Plans
Your employer may offer a retirement plan as part of your employee benefits package. Sometimes you must be on the job a specific period of time before qualifying to participate. You fund traditional employer plans by deferring a portion of your pretax salary, reducing your current taxable income. However, with a Roth 401(k) or Roth 403(b), you contribute after-tax income and may qualify for tax-free withdrawals. Some employers may also match part of your contribution. A typical formula might be 50% of your contribution, up to 5% or 6% of your salary.
All contributions to all employer-sponsored retirement plans have the opportunity to grow tax-deferred. As with individual retirement plans, in exchange for tax advantages, there are certain contribution limits and withdrawal restrictions.
Product
Who May
Offer It
Maximum Contribution
Withdrawal Restrictions
Tax Rules
Portability
Comments
Traditional 401(k)
Corporations and non-profit organizations
$16,500 in 2010 plus $5,000 catch-up if 50 or older
Must start minimum required distributions (MRDs) by 70 ½ in most cases
Withdrawals permitted only when you change jobs or retire, unless you qualify for hardship withdrawal
Withdrawals taxed at regular income tax rate
10% tax penalty for withdrawals before 59 ½
Can roll over contributions and earnings to an IRA and to other employer plans that accept rollovers
Can roll over matching money if vested
Contributions lower taxable income
Loans permitted in some plans
Traditional 403(b)
Non-profit organizations
$16,500 in 2010 plus $5,000 catch-up if 50 or older
Must start MRDs by 70 ½ unless sill working
Withdrawals permitted only when you change jobs or retire, unless you qualify for hardship withdrawal
Withdrawals taxed at regular income tax rate
10% tax penalty for withdrawals before 59 ½
Can roll over contributions and earnings to an IRA and to other employer plans that accept rollovers
Can roll over matching money if vested
Contributions lower taxable income
Loans permitted in some plans
Investments limited to mutual funds and annuities
Roth 401(k),
Roth 403(b)
Any organization that also offers 401(k) or 403(b)
$16,500 in 2010 plus $5,000 catch-up if 50 or older
Must start MRDs by 70 ½
Withdrawals permitted only when you change jobs or retire, unless you qualify for hardship withdrawal
No tax on withdrawals if you’re at least 59 ½ and account has been open at least 5 years
Tax at regular rate plus 10% tax penalty for withdrawals before 59 ½
May roll over into Roth IRA if retiring or leaving job
Cannot move assets to traditional and 401(k) or 403(b), except matching funds, if vested
Contributions made with after-tax income
Unlike Roth IRA, no income restrictions on eligibility to contribute
Matching funds made to a parallel traditional account
457
State and local government agencies and non-government tax-exempt organizations
$16,500 in 2010 plus $5,000 catch-up if 50 or older, plus additional catch-up when approaching retirement
Penalty-free withdrawals any time after retiring from government service
Must start MRDs by 70 ½
Withdrawals taxed at regular income tax rate
Contributions 100% vested
Government employees only may roll over to other employer plan
Contributions lower taxable income
Can also participate in 401(k) or 403(b) if offered
No matching
No loans
Thrift Savings Plan (TSP)
Federal agencies and organizations
$16,500 in 2010 or up to 100% of salary plus $5,000 catch-up if 50 or older
Up to $49,000 in 2010 for tax-exempt income for qualified military
Must start MRDs by 70 ½
Withdrawals per-mitted only when you change jobs or retire, unless you qualify for hardship withdrawal
Withdrawals taxed at regular income tax rate
10% tax penalty for withdrawals before 59 ½
Can roll over to IRA if retiring or leaving job
Contributions 100% vested
Contributions lower taxable income
For some federal employees, automatic match of 1% of base pay
Investment choices limited to five index funds or one lifecycle fund
Table #3: Small Business Plans
Certain types of retirement savings plans are designed specifically for small businesses and self-employed people. These plans give you access to some of the same types of tax advantages found in other employer plans, but with the additional flexibility you might need if you work for yourself or for a small business.
Among their advantages are higher annual contribution limits (compared with any other plans, individual or employer sponsored) and potentially broader choice of investments than with other employer plans.
Product
Key Characteristics
Maximum Contribution
Withdrawal Restrictions
Tax Rules
Portability
Comments
Simplified Employee
Pension (SEP)
Account in your name, funded with employer contributions
Up to 25% of salary or $49,000 in 2010, whichever is less
Must start minimum required distributions (MRDs) by 70 ½
Withdrawals taxed at regular income tax rate
10% tax penalty for withdrawals before 59 ½
100% vested at time of deposit
Can be rolled over into IRA
No loans
Doesn’t commit employer to regular contributions
Companies with 100 or fewer employees who earn at least $5,000 a year
Can be set up as SIMPLE- IRA or SIMPLE -401(k)
$11,500 in 2010 plus $2,500 catch-up if 50 or older
Must start MRDs by 70 ½
Withdrawals permitted only when you change jobs or retire, unless you qualify for hardship withdrawal
Savings Incentive Match Plans for Employees (SIMPLE)
Withdrawals taxed at regular income tax rate
Contributions 100% vested
Two-year waiting period or a 25% tax penalty on most rollovers
Contributions lower taxable income
Employer must match up to 3% of your contribution or at least 2% of your income
Account in your name, funded with employer contributions
Up to 25% of your salary, or $49,000 in 2010, whichever is less
Must start MRDs by 70 ½
Profit-sharing Keogh Plan
Withdrawals taxed at regular income tax rate
10% tax penalty for withdrawals before 59 ½
100% vested at time of deposit
Can be rolled over into SEP or other IRA
Loans may be available
Contributions may vary along with company profits
Account in your name, funded with employer contributions
Up to 25% of salary or $49,000 in 2010, whichever is less
Must start MRDs by 70 ½
Money Purchase
Keogh Plan
Withdrawals taxed at regular income tax rate
10% tax penalty for withdrawals before 59 ½
100% vested at time of deposit
Can be rolled over into SEP or IRA
Loans may be available
Employer must contribute specific percentage of each eligible employee’s earnings each year
Account in your name to which both you and employer contribute
$16,500 in 2010 from employee plus $5,000 catch-up if 50 or older Employer contribution to a maximum of to 25% of salary or $49,000 in 2010, whichever is less
As the founder of Auri Elan Financial Group, I am an experienced independent financial advisor and insurance agent specializing in providing comprehensive and objective investment consultation, financial and insurance planning to individual investors, companies, select group of affluent families and entrepreneurs. Please contact me for a complimentary Portfolio Review. You deserve nothing less than a CFP and a CFA Charterholder for your finance! Securities and Advisory Services offered through LPL Financial. A Registered Investment Advisor, Member FINRA/SIPC.
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