It is never too early to start saving for retirement. There are various options and plans that you can choose from, but the options depend on what is available to you as an individual and employee.

Individual:

Traditional IRA

• Contributions provide deductions to reduce your current year taxes.
• The earnings on the contribution will be tax-deferred; however, you will be taxed when funds are withdrawn.
• If you are not covered by any employer plan or self-employed plans.
  • The 2018 deductible contribution limit is $5,500 (with a $1,000 catch-up if you are 50 or older).
• If you are covered by an employer/self-employed plan, then you are subject to phase-outs based on your adjusted gross income (AGI).
  • If you contribute over your phase- out amount, you will end up with a portion of your contribution being non-deductible.
  • But it is still good to do since your earnings are tax deferred.
• Access to these funds are not available until you turn 59 ½ years old. If you withdraw early, you will be taxed and penalized (10%).
• Must take Required Minimum Distributions (RMD) at age 70 ½.

Roth IRA

• Contributions are not deductible.
• The earnings are tax-free upon withdrawal.
• The 2018 contribution limit is $5,500 (with a $1,000 catch-up if you are 50 or older).
• Subject to phase-out based on AGI.
• Access to these funds are not available until you turn 59 ½ years old. If you withdraw early, you will be taxed on the earnings and penalized.
• You are not required to take minimum distributions.
• Allowed to continue contributing to your plan even after age 70 ½.

Please be aware that you can contribute up to the due date of your tax return (excluding extensions).

You are always eligible to contribute to an IRA if you have earned income, but be sure to check with your employer to see if they have a retirement plan that you are eligible for.

Employer-provided plans:

• 401(k), 403(b), and SIMPLE IRA. There are various other employer-provided plans, but the ones addressed below are common.
• 401(k) & 403(b) Plans:
  • The employee contribution (deferral) limit for 2018 is $18,500 (plus $6,000 catch-up if 50 or older) with no phase-outs. Note: depending on your employer plan there may be other limits. So, check with your employer.
  • Employers have the option to make contributions for their employees, either by making a percentage match based on your deferral or a discretionary amount each year. Again, this is based on your employer’s plan.  Either way, you end up with extra retirement funds at no current year cost to you.
  • All employee deferrals and employer contributions are tax deferred until retirement.
  • The contributions/deferrals to the plan belong to the plan, which means you are restricted from taking distributions out until you retire or terminate employment.
  • Depending on your employer plan, loans or in-service distributions may be allowed.
    • Loans are required to be paid back.
    • Distributions, if not rolled into an IRA or another plan, will be taxed on, and if under age 59 ½, you are also subject to a 10% penalty.
  • Savings Incentive Match Plan for Employees (SIMPLE):
    • Similar to an IRA, but with fewer restrictions and the plan allows for deferral opportunities.
    • Employee contributions/deferrals up to $12,500 for 2018 (additional $3,000 catch-up if 50 or older).
    • The IRA account belongs to the employee; therefore, if you take early withdrawals you may be subject to a 10% penalty (25%, if the withdrawal is made within the first two years).
    • Employer is required to make the following contributions:
      • 3% matching contribution under a qualified salary reduction agreement. If you are deferring on your salary of say 5%, your employer is required to match up to 3% of your compensation to the plan, but not to exceed $12,500 for 2018.

OR

• • • • The employer can elect to do a 2% non-elective contribution of compensation.

 

You may also be eligible for a retirement savings contribution credit (savers credit) related to the contributions you make to your IRA, 401(k)s, and/or other qualified plans that allow you to have a nonrefundable tax credit of up to $1,000 if you meet the requirements.  There are certain phase-outs that limit the allowable credit.

As you can see, there are numerous options for saving for retirement. The decision of how to save for retirement ultimately falls under what you are looking for, what you are eligible for, and what options are available to you.  If you would like assistance in determining the plan option that would work best for you, feel free to contact us.

© 2018

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Written by: Michele Ahn, CPA

 

Michele is a Tax Senior at Thompson Greenspon. She is a Certified Public Accountant in Virginia, and holds a Bachelor of Science in Business majoring in Accounting and Information systems from Virginia Polytechnic Institute and State University.