Which Retirement Account is Right For You?

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3 happy girls laughing while at the beach talking about future retirement

Are you looking to set up a retirement account or an investment account? Do you want a quick explanation of your options for doing so? If so, you’ve come to the right place.

There are many acronyms and numerical distinctions out there regarding retirement accounts.

And this can make it confusing to understand how you should set up your retirement accounts. Here is a simple breakdown to help you better understand your options.

Two Main Types of IRAs

IRA is an acronym for Individual Retirement Account. As the name states, the accounts are designed to fund retirement expense needs.

There are two main types of IRAs. One is called a Traditional IRA. The other is known as a Roth IRA. Let’s talk about these two types of IRAs in detail.

Traditional IRA

The traditional IRA first became available in 1975. A traditional IRA is a tax deferred account. This means you will not be taxed on the earnings of the account until you decide to start taking money out.

You can deduct contributions to a traditional IRA on your tax return during the year you made them.

The General Limit for IRA contributions as of 2019 is $6,000. If you’re age 50 or over, you can contribute an additional $1,000 per year.

Roth IRA (Individual Retirement Account)

The Roth IRA first became available in 1997. It’s a tax-free growth account. So you will NOT be taxed on your earnings in this account.

However, you cannot deduct contributions made to a Roth IRA on your tax returns.

A Roth IRA can be a good choice for people in certain financial situations. If the money grows substantially, you could save a lot of money on taxes.

Talk to a trusted investment adviser to determine whether you should contribute to a traditional IRA, a Roth IRA or a combination of the two.

Who Can Contribute to an IRA?

Not everyone can contribute to an IRA, whether it be a traditional or a Roth IRA.

There are income limits that determine whether a person can contribute to an IRA. Here are some details on those income limits.

Single Filing Taxpayers

As a single individual filing taxes, you can contribute the full allowed amount to an IRA if you make less than $122,000 per year (as of 2019). These numbers are based on your modified adjusted gross income (MAGI).

If you are single and your income is between $122,000 and less than $137,000, you can contribute some money to an IRA. See IRS rules for more details and a calculation chart.

If you are single and make $137,000 per year or over you cannot contribute to an IRA.

Married Joint Filing Taxpayers

If you are married and filing jointly on your taxes, the limits change. You can contribute the maximum allowable IRA contribution for both parties if you earn less than $193,000 per year (MAGI).

On the other hand, if you earn over $193,000 but less than $203,000 you can contribute some money to IRAs.

But if you earn over $203,000 (MAGI), you cannot contribute to an IRA.

Talk to a trusted tax professional for more information about who can contribute to an IRA.

IRA Contribution Limits

Both traditional and Roth IRAs have contribution limits. Note that IRA contribution limits work in tandem with the above-stated income limits.

The IRA contribution limit for 2019 is $6,000. It’s the total limit whether you contribute to a traditional IRA, a Roth IRA or a combination of the two.

But your contribution limit may be less if you fall into one of the higher income brackets mentioned above.

The government has also initiated on “catch up” contribution allowance for those age 50 and above. If you are age 50 or older, you can contribute an additional $1,000 to your IRA each year, provided your income allows it.

Again, your tax adviser and/or investment professional should be able to help you determine how to contribute to an IRA. Next, let’s talk about 401k accounts.

401K (Section 401k of the Internal Revenue Code)

The 401k account is an employment-related retirement account that was enacted into law in 1978. Companies with employees offer 401k plans.

All companies manage 401ks differently. Each company has a variety of investment vehicles employees can choose to put their 401k contributions in.

Most companies have a variety of low, medium and high-risk investment accounts for 401k monies. You, as the employee, get to choose which funds to put your 401k monies in if there is more than one available.

401k contributions are taken out of your earnings on a pre-taxed basis. In other words, you’ll only pay taxes on the income you earn minus your 401k contributions.

However, you will pay taxes on money you withdraw from your 401k account.

Many company 401k plans offer a match program. For instance, if you contribute a certain percentage of your income to your 401k account, the company will match that percentage up to a certain amount.

Employer match programs basically equate to free money. If your employer has a 401k match program, it’s worth considering participating in it.

Who Can Participate in a 401k Plan?

Not everyone is eligible to take part in a 401k plan. The company you work for may have individual rules regarding who is allowed to participate.

Also, the IRS has income eligibility rules for 401k participation just as it does for IRAs.

Talk to your employer’s Human Resources representative or a trusted investment or tax professional for more information.

401k Contribution Limits

As with IRAs, 401k accounts have contribution limits. You can contribute a maximum of $19,000 to a 401k account as of 2019.

If you are age 50 or above, you can contribute up to an additional $6,000 per year as a catch-up contribution.

These contribution numbers can decrease if your income is higher, just like with IRA contribution rules.

Again, a trusted investment specialist can help you decide how much to contribute to your employer’s 401k plan.

403B (Section 403B of the Internal Revenue Code)

The 403B account is like a 401k type retirement account for employees of public schools and tax-exempt organizations.

As with the 401K, the money you contribute comes out of your paycheck before taxes. You will be taxed once you begin taking withdraws.

How Should You Manage Your Retirement Account Contributions?

Everyone has different income and deduction situations. So it’s important to talk with a tax adviser or investment professional regarding retirement accounts.

Use professionals with a proven history of good performance, either for you directly or for someone you know and trust.

If you are looking for a basic plan of action, here is something you may want to consider:

If your employer has a 401K matching plan, some investment professionals suggest you max that out.

Because you get free money on matching portions, you’ve got a cushion there in case of poor investment performance.

Most companies only match up to 5% or so of an employee’s income when it comes to 401k contributions. That small amount of your income is more easily recoverable should you lose it as a result of investment losses.

Your investment adviser can tell you if he/she suggests contributing the maximum allowable amount to your 401k or similar plan.

Anything above what you put into your 401k or similar account can go into an IRA. Your investment advisor can tell you if you should focus on receiving the benefits of tax-free growth via a Roth IRA.

So if you started investing $750 a month and received an annualized return of 8%, you would have $1,056,413 in 30 years. However, you may need more than that to retire.


Hopefully, now you have a better sense of which retirement accounts might be best for you. And in order to have money to retire, you need to start investing!

Time is on your side when it comes to investing. But the earlier you start, the more time you have for compound growth to work its magic.

According to a recent study, 1 in 3 Americans have less than $5,000 saved for retirement. Do you want to be one of those people?

Fine Print: Please keep in mind that these are solely my views. I would recommend that anyone interested in investing should do their own research. Then make an educated decision based off of that research.

If your scenario is unique and requires the attention of a personal Financial Adviser, I would highly recommend that you meet with one.

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