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Retirement Savings
Categories
- Introduction
- Types of Tax Incentives
- Maximize Company
Savings Plans
- Automatic Savings
- Contribution Limits
- Types of Retirement
Accounts
- Small Business &
Self-Employed Plans
- Asset Allocation
- Educational Savings
Accounts
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Types of
Tax Incentives
- Contributions are
invested using pretax
wages.
These are the traditional IRA and 401(k) accounts. There are two types of
incentives:
- Upfront tax
benefit – Contributions are
based on pretax dollars. If your salary, for example, is $50,000 and you
contribute $4,000 to an IRA, your adjusted gross income would be
$46,000; thus, your contribution is based on pretax dollars.
- Accumulative tax
benefit – Investment earnings,
profits, and gains are tax deferred; the earnings are not included in
your adjusted gross income.
Withdrawals are governed by statute and taxed
as ordinary income when you retire. Early withdrawals, subject to certain
exceptions, are penalized. While these plans benefit everyone, they are
particularly valuable to individuals in their peak earning years, who
anticipate being in a lower tax bracket when retired.
- Contributions are
made with after-tax
wages. These
are the Roth accounts. They also have two types of incentives:
- Accumulative tax
benefit - Earnings on the
account are not taxed, allowing the account to grow and accumulate tax
free for maximum appreciation.
-
Back-end tax benefit -
Withdrawals are not taxed.
Roth accounts are particularly attractive to
young adults and individuals who have the income to pay the taxes today. The
accounts are allowed to grow tax free. Subject to certain stipulations,
withdrawals are tax free, protecting one’s retirement nest egg against
future taxes.
- Contributions are
made with after-tax dollars for qualifying education expenses.
These are the 529 plans and Coverdell Education Savings Accounts. Taxes on
the earnings generated from these accounts are also deferred or eliminated
upon the occurrence of a specific event (i.e. used for education).
With retirement and
savings accounts, you need to keep abreast of the current IRS regulations.
The tax laws and rates are constantly changing, especially with earning
limits and contribution amounts. Visit
www.irs.gov for specific and up-to-date regulations.
Next review additional information on:
Maximizing Company Savings Plans
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