Understanding 401(K) Plans

Dollars you put into your 401(k) plan today make a big difference when you retire. The sooner you join, the bigger the difference. A two-year head start on saving $1,000 per year totals only $2,000 more now. But over time, your $2,000 earns investment income. This graph shows the difference it makes to join the 401(k) plan today rather than waiting two years. Assume total 401(k) contributions of $1,000 a year at 8% annual interest.

With 401(k), you delay taxes on the amount you save. So your employer withholds less taxes today. Your money earns interest, your interest earns interest, and you delay taxes on all of those dollars until you start receiving benefits.

401(k) is a section of the Internal Revenue Code that gives a special tax break to help people save for retirement. 401(k) is not like a bank savings account and may limit any withdrawals you choose to make. See your plan booklet or your plan sponsor for more information.

When you save with 401(k), your money combines with many other people's money. This creates an investment pool totaling millions. That gives your money earning power. With 401(k) your money may earn better interest than you can find on your own. The sooner you join, the faster your money grows. After all, Planning Your Retirement must be your top priority!

A 401(k) offers: Savings for your future, Lower current income taxes, Convenient payroll deduction and Professional money management

Understanding 403(b) Plans

The 403(b) was originally established for educational and non-profit organizations. A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. Individual accounts in a 403(b) plan can be any of the following types:
An annuity contract, which is usually provided through an insurance company,
A custodial account, which is invested in mutual funds or
A retirement income account set up for Hospital/church employees.
Generally, retirement income accounts can invest in either annuities or mutual funds.
The features of the 403(b) plan are very similar to the 401(k) plan. Employees may make salary deferral contributions that are usually limited by regulatory caps. There is no employer match in 403(b) plan like most 401(k) plans.

Tax-sheltered annuities (TSAs) is a term associated with the retirement plans of certain tax-exempt organizations, under section 501(c)(3) of the Internal Revenue Code, and educational organizations of state or local governments. Employees of tax-exempt groups, such as hospitals, social service agencies and public schools, can elect to defer a portion of their salaries for retirement in what are called 403(b) plans, just as people who work at many companies can defer a portion of their salaries in retirement plans that are called 401(k)s. (The numbers—403(b) and 401(k)—refer to the sections of the federal tax law which governs the plans.).

In the past, 403(b) plans of eligible employers could only invest in annuities, giving rise to the name tax-sheltered annuities. Currently, mutual funds also are an investment option for 403(b) plans. Despite the availability of mutual funds, the name tax-sheltered annuities has stuck. Many people who work for eligible employers refer to the investments of 403(b) retirement plans as TSAs, even though their TSA could now be a mutual fund–a 403(b)(7)– known as a custodial account. Whether your tax-exempt organization calls its retirement plan a 403(b) or a TSA, there are important reasons for you to consider participating in it.

Understanding ROTH IRA

The Roth IRA is the greatest financial account available to investors in the United States. Most people can put their money in a Roth IRA account and believe it or not, when compared to 401(K) or traditional IRA , Roth is a by far most flexible and likely will lead to more money in your retirement. Unfortunately, not everyone is eligible for a Roth IRA account. Once your adjusted gross income(AGI) reaches $95,000(if you're single) or $150,000(if you're married), the amount you can contribute to a Roth begins to fall, reaching zero for those with AGI of $110,000(singles) and $160,000(married). Contributions (subject to annual limits) are made with after-tax dollars. All Roth IRA contributions can be withdrawn at any time without any penalty. Once you reach the age of 59 1/2 (subject to the five year rule), all withdrawals are absolutely, 100% tax-free! In other words, if you purchased $10,000 worth of the next-Google through your Roth IRA and held it for twenty years, selling the stake at retirement for $5 million, you would owe Uncle Sam nothing.
Additional benefits of a Roth IRA
No mandatory distribution age
Roth IRA contributions can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
If you’ve been unemployed for longer than twelve weeks, you can use Roth IRA funds to pay medical insurance premiums without penalty
Certain higher education costs for you, your spouse, and your immediate family can be funded through your Roth IRA
Medical expenses in excess of 7.5% of your gross adjusted income can be paid for, without penalty, by your Roth IRA.
You can open a Roth IRA at any brokerage firm.

Understanding Traditional IRA

A Traditional Individual Retirement Account (or Traditional IRA for short), is a special type of account which allows investors to make tax-deductible contributions. This option is available only if you do not participate in a 401(K) plan offered by your employer. money put in traditional IRA account is pre tax money. This money can be invested in stocks, bonds, mutual funds, etc., and the earnings grow tax-free until the account's owner turns 59 1/2 years old (if money is withdrawn before this age, a 10% penalty is incurred). At this time, the account holder is allowed to begin withdrawing money from the account to fund their retirement. The distributions are fully taxed by the U.S. government. Money must be withdrawn from the account no later than the April 1 following the year the owner turns 70 1/2.
The traditional IRA was essentially the only choice until the late 1990's when Congress passed the Taxpayer Relief Act of 1997, at which time the Roth IRA was created

Tax deductible contributions (depending on income level)
Withdrawals begin at age 59 1/2 and are mandatory by 70 1/2.
Taxes are paid on earnings when withdrawn from the IRA
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available to everyone; no income restrictions
All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to certain exceptions).

Annual contribution limits are identical to Roth IRA accounts.

Traditional vs. Roth IRA

Many people get confused when talking about IRA accounts in general. Remember, A traditional IRA ia very different product when compared to a Roth IRA and not picking up the right product may have major and potentially large financial consequences. Both forms of the IRA are great ways to save for retirement, although each offers different advantages.

Traditional IRA Features
Tax deductible contributions (depending on income level)
Withdraws begin at age 59 1/2 and are mandatory by 70 1/2.
Taxes are paid on earnings when withdrawn from the IRA
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available to everyone; no income restrictions
All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).

Roth IRA Features
Contributions are not tax deductible
No Mandatory Distribution Age
All earnings and principal are 100% tax free if rules and regulations are followed
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

As you can see, the biggest difference between the Traditional and Roth IRA is the way the U.S. Government treats the taxes. If you earn $60,000 a year and put $3,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $57,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.
On the other hand, if you put the same $3,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.