In today's world there are various tax deferred retirement accounts that you can open that will not incur tax until retirement or ever. In this article, I will review the basics of these accounts. You can open one account of each type per person if you choose. That means married couples can have 6 accounts (3 each).
401(k) - This plan is setup by your employer but the choices are limited to funds that your employer has selected with the provider that services it. Many times the selections can be very limited and include my favorite, the retirement year fund. This is another marketing double take that Wall St. is promoting and that I hate. It goes like this. Figure out the year you'll turn 65 and then invest 100% of your account in that fund. What a bunch of baloney. That assumes everyone has EXACTLY the same life situation and retirement income needs. It doesn't get more cookie cutter than this! You can also usually change a standard 401(k) to a self directed 401(k) to get more investing options. 401(k) programs are pre-tax retirement accounts so the funds get deposited before tax and lower your taxable AGI (adjusted gross income).
2013 Contribution limits below:
- $17,500 per year
- $23,000 per year (age 50 and over)
IRA - An IRA is a pre-tax benefit plan that is similar to the Roth in structure but in which you get tax savings today instead of in the future. Like a 401(k), your contributions are taken out of your paycheck BEFORE they are taxed. The catch is that you will pay taxes on distributions once you retire. You can change this to a self directed IRA to get more investing options. An IRA already has unlimited buying options within both the stock and bond markets, so the point of a self directed IRA is to buy other investments like gold, real estate, businesses, etc.
2013 Contribution limits below:
- $5,500 per year
- $6,500 per year (age 50 and over)
Roth IRA - This is a retirement account that is tax free in the future. The Roth is setup so that you pay tax on your income now but once you put it into your Roth account, it's never taxed again. Except for this key difference it works in exactly the same way as a "traditional" IRA.
2013 Contribution limits below:
- $5,500 per year
- $6,500 per year (age 50 and over)
- For singles, after your AGI reaches $112,000 your contributions start getting limited. If your AGI is more than $127,000 in a year you cannot contribute to a Roth IRA in that year.
- For married couples, after your AGI reaches $178,000 your contributions start getting limited. If your AGI is more than $188,000 in a year you cannot contribute to a Roth IRA in that year.
Contribution limits for all of these plans are revised every few years so make sure to stay updated on them. You can find them on the IRS website.