Retirement planning should be integral to every person’s financial plan, regardless of one’s age. There are several different types of retirement funds, and each have specific limitations set by the IRS as to how much money an individual can contribute to his or her respective retirement fund for any given year. It is highly recommended to contribute as much as possible each year, within the IRS limitations, to your retirement savings. This can help assure financial security when reaching retirement age. In addition to the long-term benefits for retirement savings, there are also short-term benefits. For example, one of the incentives to contribute to a retirement fund is that it could make you eligible for a tax credit on your income tax return.
Types of Retirement Accounts
Nearly all types of retirement plans offer some form of tax advantage, whether it is during the time period of accruing savings, or upon the time of withdrawal. Depending on an individual’s situation, he or she may opt for one type of retirement account over another based on the tax implications. Here is a breakdown of the basics of several different types of retirement accounts available:
- 401(k): is a retirement account that is funded with pre-tax wages, typically directly from one’s paycheck. Hence, the contributions are able to grow tax-free until funds are withdrawn at retirement age (59.5 years of age). Upon retirement, distributions of one’s 401(k) fund create a taxable gain. If funds are withdrawn prior to reaching age 59.5, there is a ten percent early withdrawal penalty. This type of retirement savings plan also enables an employer to match one’s personal contribution. In 2019, both workplace and solo 401(k) contribution limits were set at $19,000 for individual under age 50, and an additional $6,000 for individuals 50 years old or older (known as the 401(k) catch-up contribution). The IRS has increased the contribution limit for workplace 401(k) to $19,500 and the 401(k) catch-up contribution to $6,500 for 2020, but solo 401(k) contribution limits will remain the same as 2019. Contributions to a 401(k) usually only apply to the calendar year in which they were withheld; meaning contributing to your 401(k) in 2020 in hopes to receive the tax benefits for 2019 will not work, as the deadline to fund a 401(k) is the year’s end.
- 403(b): are very similar to 401(k) plans in most aspects with the exception that they are offered by nonprofit organizations, public schools, charities and others.
- 457(b): again, similar to 401(k) plans as well as 403(b) plans, 457(b) retirement plans are only available for employees of state and local governments, as well as some additional tax-exempt organizations. One notable difference is that 457(b) plans do not penalize individuals for withdrawing funds prior to age 59.5 as occurs with both 403(b) and 401(k).
- IRAs: there are several different types of IRAs (i.e. Roth IRA, spousal IRA, rollover IRA…etc.). The contribution limit for IRAs in 2019 was $6,000 for individuals under age 50 and an additional $1,000 as a catch-up contribution for those older than 50. There has been no change regarding contribution limits for IRAs in 2020. One of the benefits of IRAs is the ability to contribute to your account after the year’s end up until the tax-filing deadline in mind April. This means that individuals are able to contribute to their IRA retirement plan three and a half months after the end of the year and still benefit from the tax implications for the previous year. The purpose being that it allows individuals the opportunity to do their tax calculations, gain a clear understanding of their precise taxable income, and contribute to their retirement account accordingly.
For Further Information
If you follow your instincts and are clear with your needs you will likely find an accountant that is an excellent fit. While the task to connect with the right accountant may seem overwhelming, please keep in mind it will be worth it in the long run. The financial guidance that a good accountant will provide during one’s lifetime can result in significant financial gain. With the full range of accounting services Allman & Allman APAC provide, we are certainly equipped with the expertise for which you may be in need. Seeking guidance from our firm will proved you the opportunity to work with individuals armed with broad and deep financial knowledge, able to provide advice on a wide range of issues. As a full-service public accounting firm, our professional services will surely help you succeed and thrive. Please feel free to reach out to Allman & Allman APAC via email at [email protected] or via phone at 760-406-5056 to discuss your situation and find out how we can help you grow. We look forward to hearing from you.
References
Appleby, Denise. (2020 January 29). “Deadline To Fund 401(k) Is Year’s End.” Investopedia, Investopedia. Retrieved February 8, 2020, from www.investopedia.com/ask/answers/06/salarydeferral401(k).asp
Chis. (2020 January 5). “2020 Retirement Plan Contribution Limits.” Investor Junkie. Retrieved February 8, 2020, from www.investorjunkie.com/taxes/retirement-contribution-limits/
Ebeling, A. (2019, December 16). IRS Announces Higher 2020 Retirement Plan Contribution Limits For 401(k)s And More. Retrieved February 8, 2020, from https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#5851a13633bb
Royal, James. (2020 February 5) “10 Best Retirement Plans In 2020.” Bankrate, Bankrate.com. Retrieved February 8, 2020, from www.bankrate.com/retirement/best-retirement-plans/
