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Your guide to retirement accounts


Individuals 02.26.2021 2 MIN

 

It’s important to choose the right type of retirement savings account(s) for you. Each type of account has features and benefits that may align with your needs, preferences and plans. 

Company-sponsored 401(k) savings plans, 403(b) plans and 457(b) plans

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.  

  • These plans are tax-deferred accounts, meaning you don’t pay any income tax on the account’s investment earnings until you take a distribution
  • Your contributions can generally be made through payroll deductions, making it simple and convenient to save for retirement
  • In 2021, you can contribute up to $19,500 on a pre-tax basis (or after-tax basis [Roth], if the plan allows). A 457(b) plan may also allow for additional contributions to be made on an after-tax basis
  • If you’re over age 50, you can make catch-up contributions up to an additional $6,500. 403(b) and 457(b) plans have additional catch-up provisions that may apply as well
  • Many employers match certain contributions—generally as a percentage of your compensation. Additionally, they may make other types of contributions that don’t require a match, such as a fixed percentage of your compensation
  • Your and your employer’s annual contributions (other than catch-up contributions) count toward the overall IRS limit of $58,000. Total contributions to 457(b) plans are limited to $19,500 in 2021
  • Your contributions and, generally, any company contribution you may receive, can be invested in the plan’s specific list of options. These are typically mutual funds (including asset allocation funds) or investment trusts, and may include an option to invest in company stock
     

Taxation of Contributions, Earnings and Withdrawals

Contribution Type Contributions Earnings while still invested Withdrawals
Before-Tax Not taxed Not taxed Taxable
Roth Taxable Not taxed*
After-Tax Taxable Taxed on a pro-rata basis**
Company Contributions Not taxable Taxable


 

Individual Retirement Accounts (IRAs)

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.

Spousal IRA

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.
 

Simplified Employee Pension (SEP) & Savings Incentive Match Plan for Employees (SIMPLE) IRAs

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:

  • Determine your options for saving pre-tax, Roth and/or after-tax in your employer-sponsored plan and/or through IRAs
  • Identify your tolerance for risk and compare an appropriate portfolio allocation to your current investment holdings. If appropriate, your coach can help you make a plan to change your investments to a more appropriate, diversified mix

 

 

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:

  • Single/Head of Household - $66,000-$76,000
  • Married Filing Jointly - $105,000-$125,000
  • Married Filing Separately - $0-$10,000



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