Types of Retirement Accounts: Letter From the President

Here we are again at tax season. It happens each year that we try to find as many deductions as possible to lower the tax amount owed. It is also a time when we look at retirement options. Should you fund a Traditional IRA or does a Roth IRA make more sense? Traditional IRA contributions may be partially or fully tax deductible depending on your individual circumstances. Are you covered by an employer plan? You may still be eligible to deduct.

What is your annual income? If your income doesn’t exceed certain limits, you may still be able to make a deductible contribution.

Types of Retirement Plans: Traditional IRA

Traditional IRAs can lower your current tax bill because the contribution is tax deductible. However, many individuals, who originally had a Traditional IRA, no longer qualify to make a tax deductible contribution to it. In such a case, an individual can still choose to contribute to their IRA, but the contribution will be considered non-deductible for income tax purposes. Many financial advisors do not recommend combining deductible and non-deductible contributions in a Traditional IRA. If you are considering it, you should contact a professional advisor before you make the contribution.

Types of Retirement Plans: Roth IRA

An alternative is a Roth IRA. As with a Traditional IRA, certain income limits must be met before you make full or partial contributions. Roth IRAs offer no immediate tax deduction, but offer future tax benefits, such as tax free withdrawals after both 5 years and attaining age 59 ½. Roth IRAs have become popular with young investors or individuals who don’t have a 401(k) or a retirement plan through their employer.

Types of Retirement Plans: Solo 401(k) & SEP IRA

Small business owners or sole proprietors can benefit from a Solo 401(k) plan or a SEP IRA. These plans are especially desirable for individuals who have no employees and are easy to setup and maintain. A Solo 401(k) needs to be established by 12/31 whereas a SEP IRA can be established up to your personal filing date, including extensions. Simple Plans are available for small businesses and are also easy to setup. However, Simple Plans must be set up no later than October 1 to qualify for favorable tax treatment.

Which Types of Retirement Plans Are Best For You?

Sorting through the various retirement options can not only be time consuming, but also confusing with all of the rules and requirements, such as filing dates, contribution limits (including catch up provisions) and eligibility. And, of course, what type of plan makes the most sense for you.

Independent studies have shown that, on average, Social Security will only provide about forty percent of your pre-retirement income; so saving for retirement isn’t only a way to save on taxes, but also to help to add to your income when you finally take the big step to retire!

Let’s Talk to help you sort out your options and determine which solution makes sense for you.