AS WE BEGIN TO CLOSE out the year, we should be mindful that we are doing all we can do take advantage of the opportunities for retirement savings that are available to us. When doing so, it is important to note the different types of accounts we may have access to, as well as the varying benefits that each provides.
Traditional IRA:
The Traditional IRA provides a very basic avenue for contributing to a retirement account in a tax-advantaged way. Savings are made on a pre-tax basis, and your contributions are generally tax-deductible to you in the current year. In these types of accounts, you receive a tax-break on the “seed,” but the “harvest” grows to be completely taxable to you in retirement, assuming you adhere to distributions rules. If you qualify, contribution limits are up to $5,500 in 2018 with an additional $1,000 available if you are age 50 or older as a “catch-up” contribution.
Roth IRA:
The Roth IRA functions very similarly to the Traditional IRA with the biggest difference being the way in which contributions and distributions are taxed. In the Roth IRA, your contributions are made on an after-tax basis, and your distributions are generally tax-free. You’re being taxed on the “seed”, and the “harvest” grows to be tax-free. Contribution limits are the same as with Traditional IRAs, but be mindful of income limits, as those with higher incomes may not be eligible to contribute.
401(k), 403(b), 457 (deferred-comp), etc.:
These accounts are the accounts that most people are provided through their employers. Generally, 401(k)s are provided by private sector, for-profits; 403(b)s by schools, hospitals, and many non-profits; 457 (deferred comp) plans are provided to many state and municipal employees. All of these accounts function fairly similarly, in that the participant makes pre-tax contributions to the plan, usually through payroll deductions, and receives a tax deduction in the current year. At distribution, proceeds are taxed similarly to the Traditional IRA. These types of plans also generally benefit from higher contribution limits than IRAs, which are up to $18,500 regular contributions, in 2018, with the ability to contribute up to an additional $6,000 as catch-up contributions for those over age 50.
Roth 401(k):
The Roth 401(k) is a fairly recent addition to the mix. These accounts combine the convenience and higher contribution limits of the 401(k) with the long-term tax benefits of the Roth IRA. If your employer does not currently provide a Roth 401(k) option, you may want to consider asking Human Resources or other decision makers to sponsor a plan, as the benefits may be substantial.
Simple IRA:
If you work for a smaller employer which may not sponsor a plan, you may be scratching your head for savings opportunities. This is where the SIMPLE IRA may help. SIMPLE plans are employer-sponsored, with employers making matching or elective contributions, but are much easier to administer than a 401(k). SIMPLE plans function similarly to a Traditional IRA, but with substantially higher employee contribution limits of $12,500 in 2018, with catch-up contributions of an additional $3,000.
SEP IRA:
The SEP IRA is another great option usually provided by smaller employers. These types of accounts are funded entirely by employer contributions. They enjoy similar long-term tax treatment as Traditional IRAs and SIMPLE plans. In these plans, employers contribute a percentage of income, up to certain limits for themselves, and must make matching contributions, on a percentage basis, to each qualifying employee.
As you can see, there is no shortage of types of accounts into which you could be pouring additional retirement savings. The key is to determine what kind of long-term tax treatment you want your accounts to enjoy, and to understand what plan options are currently available to you. Many employers that may not currently be sponsoring a plan, might be willing to if they knew that their employees would take advantage of the benefits they provide.
When it comes time to make a decision about where to save, be sure to discuss with your tax professional and financial advisor so that the option you choose makes sense in the context of your overall financial strategy.
Stephen Kyne is a partner at Sterling Manor Financial, LLC in Saratoga Springs and Rhinebeck. Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, an SEC registered investment advisor or Cadaret Grant & Co., Inc. Sterling Manor Financial and Cadaret, Grant are separate entities.
