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New tax laws in recent years
have increased the number of tax-deferred retirement accounts available. Because of the
various rules governing eligibility, you should consult a professional tax advisor when
deciding which of the following options best suits your situation.
401(k) – You may make pretax contributions of up to $10,000 a year,
with possible employer match. You earn compound interest. Applicable taxes must be paid
when money is withdrawn, and there is a 10% penalty for early withdrawal (before 59 ý).
Regular IRA – You may contribute up to $2,000 a year. Whether these
contributions are tax deductible depends on whether you participate in a 401(k) and what
your income level is. You earn compound interest. Applicable taxes are due when money is
withdrawn, and there is generally a 10% penalty for early withdrawal (before 59 ý) of
pre-tax contributions and the account’s earnings.
Roth IRA – You may contribute up to $2,000 a year. Contributions are
not deductible, but interest grows tax-free and you pay no tax upon withdrawal. If your
gross income is over $160,000 for joint filers or $110,000 for single filers you may not
contribute to a Roth IRA.
Spousal IRA – A non-working spouse may contribute up to $2,000 a
year to a spousal IRA, even if his or her spouse is covered by a 401(k) plan at work.
Whether contributions are tax-deductible depends on income level and participation in an
employer-sponsored plan.
SIMPLE IRA – A SIMPLE IRA works a lot like a traditional IRA except
that you can contribute more (up to $6,000, or 15% of salary) and employer matching
contributions are allowed. A self-employed person can contribute $6,000 as an individual,
and his company can match his contributions dollar-for-dollar, for a total annual
contribution of $12,000. Another plus, the SIMPLE plan you set up now can grow with your
company (up to 100 employees).
SIMPLE 401(k) – A SIMPLE 401(k) works much like the SIMPLE IRA with
a few notable exceptions. On the downside, it requires a lot more reporting and
administration than a SIMPLE IRA. On the upside, a SIMPLE 401(k) allows for hardship
withdrawals and loans. The maximum annual contribution is $10,000, and the maximum annual
employer match is $4,800.
Simplified Employee Pension IRA (SEP-IRA) Plans – SEP plans are
essentially individual retirement accounts (IRAs). Like an IRA account, the money you
contribute to a SEP-IRA is tax-deductible and your investment earnings grow tax-free until
you withdraw funds at retirement. You can contribute up to 15% of your compensation or
$30,000, whichever is less, each year.
Keogh Plans – If your business is not incorporated, you may be
eligible to establish a Keogh plan. Keogh plans are generally more flexible than SEPs and
may allow you to save even more toward your retirement than you can in a SEP plan. Keoghs
can be set up as either a defined contribution plan (like a 401(k) or SEP) or as a defined
benefit plan (like a traditional pension). Along with added flexibility, Keogh plans also
bear additional complexity -- if you're considering a Keogh plan, you may want to seek the
advice of a pension professional.
403(b) plans – These are similar to 401(k) plans, and are sometimes
referred to as "401(k)s for non-profits" because they are commonly used by
non-profit institutions like hospitals, public school systems and charitable
organizations. |
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