Life Events

For most people, retirement accounts are the largest source of tax-advantaged savings. Knowing the differences among them helps you choose where to put your money and how to take it out.

What types of retirement accounts are there?

Workplace plans include 401(k) plans, 403(b) plans for certain nonprofit and school employees, and governmental plans. Individuals can use traditional and Roth IRAs. Self-employed people and small businesses can use plans such as SEP IRAs, SIMPLE IRAs and solo 401(k) plans.

What is the difference between pre-tax and Roth accounts?

With a traditional, pre-tax account, contributions may reduce your taxable income now, and withdrawals in retirement are taxed as ordinary income. With a Roth account, contributions are made after tax, but qualified withdrawals are tax-free. The better choice depends partly on whether you expect your tax rate to be higher or lower in retirement.

Are there limits on contributions?

Yes. The IRS sets annual limits that vary by account type and may be higher for people over a certain age. These amounts change over time, so check irs.gov or ask us for the current figures.

What about my employer's match?

If your employer matches contributions, contribute at least enough to receive the full match. It is effectively extra compensation. Also note the plan's vesting schedule, which determines when employer contributions become fully yours.

Can I take money out early?

Withdrawals before the age set by the IRS are generally subject to income tax plus an additional penalty, though exceptions exist for certain situations. Some plans allow loans, but if you leave your job, an unpaid balance may become taxable.

When do I have to start withdrawing?

Most pre-tax accounts require minimum distributions beginning at an age set by law, which has changed in recent years, so confirm the current rule. Roth IRAs do not require withdrawals during the original owner's lifetime. Missing a required distribution can result in a significant penalty.

What happens to the account when I die?

The account passes to the beneficiaries you named on the form, regardless of what your will says. Keep your designations up to date after marriage, divorce or the birth of a child. Rules for how heirs must withdraw funds can be strict.

For help choosing and coordinating accounts, contact our office.