Some of the better tools for retirement planning are tax-advantaged, retirement-specific plans. These include your 401(k) plan, 403(b) plan, Traditional IRA, Roth IRA, and 457 plan.
In general, contributions to these plans are made with either pre-tax dollars or after-tax dollars, and your employer may match what you contribute.
A 401(k) plan is a tax-deferred retirement plan that is sponsored by your employer.
It allows you to invest pre-tax income from your paycheck, and your taxable income will be based on your income minus your contribution.
For example: if you earn $100,000 per year and you invest $5,000 in your 401(k) plan, your taxable income will be $95,000.
The 401(k) plan offers a variety of investments that are usually managed by a plan administrator, not the company.
Many employers match your contribution up to a certain percentage, so in general it is a good idea to contribute the same amount that your employer is willing to match.
For example: if your employer matches up to 3% of your annual income, and you make $150,000 per year, then you could save $9,000 in pre-tax income annually ($4,500 x 2).
However, there are restrictions to the 401(k) plans.
IRA or Individual Retirement Account is a tax-deferred retirement account that is not sponsored by your employer.
Investing in a traditional IRA may lessen your tax burden each year that you make a contribution. If you are under 50 years old, the maximum you can contribute to a Traditional IRA is $5,500. If you are age 50 or older, the maximum contribution is $6,500. However, the IRA contribution limit does not apply to rollover contributions.
Here are the current restrictions for a traditional IRA account:
A Roth IRA plan is not tax-deferred because you pay your taxes up-front.
The advantages to a Roth IRA are:
403 (b) plan is a tax-deferred retirement plan offered by tax-exempt organizations and educational systems.
With a 403 (b) plan your pre-tax monies are invested in either annuities or mutual funds.
Generally, only your employer can make contributions to your 403(b) account. However, some plans will allow you to make after-tax contributions.
Here are the current rules for a 403(b) account:
A 457 plan is a tax-deferred retirement plan for state and local public employees.
It is similar to a 401(k) plan except there is no penalty for withdrawing monies before age 59 ½. However, you will have to pay income tax for early withdrawal.
You are generally eligible to withdraw funds from your 457 plan under the following circumstances:
Contact us today to discuss all of your retirement options. RMT Wealth Management is conveniently located in Saddle Brook, New Jersey.
The information contained herein is not intended to constitute legal or tax advice. Tax issues involving retirement plans can be complex.
For specific information that applies to your circumstances you should consult a qualified legal/tax advisor. In accordance with IRS Circular 230 Disclosure, and to ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this material was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.