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Retirement Savings

Retirement Savings
Categories

 - Introduction
 - Types of Tax Incentives
 - Maximize Company
    Savings Plans
 - Automatic Savings
 - Contribution Limits
 - Types of Retirement
    Accounts
 - Small Business &
    Self-Employed Plans
 - Asset Allocation
 - Educational Savings
    Accounts

 

 

 


Types of Tax Incentives

 

 

  1. Contributions are invested using pretax wages. These are the traditional IRA and 401(k) accounts. There are two types of incentives:
     
    1. Upfront tax benefit – Contributions are based on pretax dollars. If your salary, for example, is $50,000 and you contribute $4,000 to an IRA, your adjusted gross income would be $46,000; thus, your contribution is based on pretax dollars.
       
    1. Accumulative tax benefit – Investment earnings, profits, and gains are tax deferred; the earnings are not included in your adjusted gross income.

Withdrawals are governed by statute and taxed as ordinary income when you retire. Early withdrawals, subject to certain exceptions, are penalized. While these plans benefit everyone, they are particularly valuable to individuals in their peak earning years, who anticipate being in a lower tax bracket when retired.

  1. Contributions are made with after-tax wages. These are the Roth accounts. They also have two types of incentives:
     
    1. Accumulative tax benefit - Earnings on the account are not taxed, allowing the account to grow and accumulate tax free for maximum appreciation.
       
    1. Back-end tax benefit - Withdrawals are not taxed.

Roth accounts are particularly attractive to young adults and individuals who have the income to pay the taxes today. The accounts are allowed to grow tax free. Subject to certain stipulations, withdrawals are tax free, protecting one’s retirement nest egg against future taxes.

  1. Contributions are made with after-tax dollars for qualifying education expenses. These are the 529 plans and Coverdell Education Savings Accounts. Taxes on the earnings generated from these accounts are also deferred or eliminated upon the occurrence of a specific event (i.e. used for education).

With retirement and savings accounts, you need to keep abreast of the current IRS regulations. The tax laws and rates are constantly changing, especially with earning limits and contribution amounts. Visit www.irs.gov for specific and up-to-date regulations.

Next review additional information on: Maximizing Company Savings Plans

 

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