Tax-Deferred Retirement Account Options
- The Internal Revenue Service offers tax-deferred retirement accounts in order to encourage retirement savings. By offering tax benefits for saving, the IRS can be proactive in assuring individuals will depend less on social services and more on their own retirement savings in the future. Each option is designed to benefit a specific need in order to encourage even more savings.
- 401k plans are offered by employers to employees. This type of plan is most advantageous for a large employer because it requires a high degree of administration.
A 403b plan mimics a 401k plan in all ways except this type of arrangement is extended to public service employees and non-profit organizations.
Any organization offering a 457b plan must be a state or local government or a tax-exempt organization under IRC 501(c). Like 401k and 403b plan contributions, contributions to a 457b account are withheld directly from a paycheck.
If your employer does not offer a 401k plan, you have the option of setting up an Individual Retirement Account. In fact, even if you do have a plan through your employer, you may consider using an IRA structure if you want to have more control over your retirement savings. Examples of IRA based plans include SEPs, SARSEPs and SIMPLE IRAs. - Since there are so many types of retirement plans, it is important to prioritize your savings needs and choose a plan with features matching your needs. Those needs may include self-management of your account or flexibility for your year-to-year income changes. For example, if you would like to manage your account yourself, choose an IRA rather than a 401k. You will have more control over an IRA since it is a plan for one person alone, and you can even choose a self-directed IRA if you wish to choose your investments individually.
- Perhaps the biggest consideration with a retirement account is the tax benefit it offers. Some 401k and IRA plans offer a unique Roth structure. With a Roth plan, you receive no benefit to your taxes in the current year. Instead, you place post-tax dollars in the account, but they grow tax free and you pay no taxes upon retirement. Generally, the tax advantages to a Roth are highest for low income individuals, but they may offer benefits to even high income tax payers. It is permissible to mix a Roth structure with a traditional structure as long as your contribution total does not exceed the annual maximum.
- The IRS offers advice on how much you should save for retirement. If you are uncertain about your saving needs and desires, it is beneficial to speak with a retirement planner. You may need to talk with an independent counselor, or you can consult the AARP, your union leaders and representatives, or the administrator at your company.