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The most common company-sponsored retirement plan is a 401(k). Non-profit organizations may sponsor a 403(b) plan and government employers may sponsor a 457(b) plan. All have similar features. Here are the basic things you need to know.
Taxation of Contributions, Earnings and Withdrawals
|Contribution Type||Contributions||Earnings while still invested||Withdrawals|
|Before-Tax||Not taxed||Not taxed||Taxable|
|After-Tax||Taxable||Taxed on a pro-rata basis2|
|Company Contributions||Not taxable||Taxable|
IRAs allow account holders to save for retirement through a financial institution, independent of their employers. Just like a 401(k), you can contribute to an IRA and invest your money to grow tax-deferred.
|Traditional IRA||Roth IRA|
|Contributions||May be tax deductible3||Not tax deductible|
|Qualified withdrawal parameters||Must be at least 59½ years old||Must be at least 59½ years old and have had the account for five years|
|Tax on qualified withdrawals||Taxed on deductible contributions and any earnings||N/A|
|Phase out of contributions based on modified AGI||N/A||Single/Head of Household: $125,000-$140,000
Married Filing Joint: $198,000-$208,000
Married Filing Separately: $0-$10,000
|2021 Contribution limits||For 2021, you can contribute up to $6,000 total to any and all IRAs you have. If you will be at least age 50 by the end of the year, you can make an additional $1,000 catch-up contribution.|
Account holders often find a Roth IRA attractive because it offers the ability to take tax-free withdrawals from the account. As long as you follow the parameters of a qualified withdrawal, as mentioned on the chart above, any withdrawal from contributions and earnings will be tax-free. You can also take withdrawals up to the amount of your contributions at any time—even before age 59½—without being taxed.
If you are a single-income, married couple filing your taxes as married filing jointly, you can contribute to a Spousal IRA. A Spousal IRA allows the spouse with little to no income to open an IRA (traditional or Roth) where the working spouse can contribute up to the annual limit plus any catch-up, as applicable.
These accounts are available for those who are self-employed or own small businesses. A SEP IRA allows business owners to set up traditional IRAs for themselves and/or their employees. A SIMPLE IRA is a traditional IRA that is set up for employees with the requirement of employers to contribute to the plan. Employees are allowed to contribute to the plan if they would like to.
If Ayco is offered by your employer, speak with a financial coach to discuss your retirement and:
1Not taxed if part of a qualified distribution. A qualified distribution is one that is made after a five-year participation period and is made on account of a participant attaining age 59½, or upon death or disability.
2Generally, withdrawals from your account come out pro-rata based on the amount attributed to your contributions and investment earnings. The portion from your contributions is not taxable, however the portion from investment earnings is taxable.
3Anyone with earned income may contribute to a traditional IRA. However, your ability to deduct the amount of your contribution from your taxable income may be limited based on your modified adjusted gross income. In 2021 the limits are as follows:
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Updated for tax year 2022