The best way to ensure a comfortable retirement is by contributing as much as possible to retirement plans and starting as soon as possible. Anyone earning income can make an annual contribution to their IRA. The IRS allows wide latitude regarding IRA investment vehicles, but it does not permit investing in life insurance or collectibles, such as art, antiques and gems.
While most people have heard of 401(k) employer-sponsored retirement programs, they may not know about 403(b) accounts. These tax-sheltered annuity plans are not available to the general public, but only to those engaged in nonprofit occupations. They are similar in structure to 401(k)s.
How Traditional IRAs Work
Traditional IRAs allow account owners to save for retirement while enjoying tax advantages until retirement occurs. Earnings in a traditional IRA are not taxed until you begin making withdrawals. While the account owner may start making withdrawals from a traditional IRA after the age of 59 1/2 without penalty, withdrawals are mandatory after age 70 1/2.
Failure to make mandatory withdrawals will cost the account owner a 50 percent penalty on the amount that should have been withdrawn. Withdrawals are taxed at ordinary income rates, which are generally lower in retirement than during the working years.
While there is no income limit for traditional IRA contributions, there is a limit on deductibility if the account owner or their spouse is covered by an employer-sponsored retirement plan, such as a 403(b). If there is an employer-sponsored retirement plan in place, for 2019 a single person (or head of household) with a modified adjusted gross income (AGI) up to $64,000 may deduct their full contribution. If earning up to $74,000, a partial deduction is permitted. Married couples filing jointly or qualifying widow(er)s may have a modified AGI up to $103,000 and take a full deduction, and a partial deduction up to an AGI of $123,000; but taxpayers with married filing separately status with a modified AGI up to $10,000 may take a partial deduction.
How Roth IRAs Work
Roth IRA contributions are not deductible, but since these contributions are made with post-tax earnings, they are not taxed at withdrawal. In fact, if the account owner doesn’t need the money, they don’t have to take withdrawals, but can leave their Roth IRA assets to heirs. Unlike traditional IRAs, those past the age of 70 1/2 who are still working can contribute to a Roth IRA.
Roth IRAs are not available to very high income individuals. For tax year 2019, taxpayers filing single, head of household or married filing separately (living apart from their spouses for the entire tax year) with a modified AGI of up to $122,000 may make a full Roth IRA contribution, and a partial contribution until the AGI reaches $137,000. For married couples filing jointly and qualifying widow(er)s, those with an AGI of up to $193,000 may contribute fully and may make partial contributions up to a $203,000 AGI. Taxpayers who are married filing separately (but who lived with their spouses for any part of the tax year), and whose income is less than $10,000, can contribute only a reduced amount to their Roth IRA.
How 403(b) Accounts Work
Employees of public schools and certain tax-exempt organizations may contribute to employer-sponsored 403(b) accounts. Contributions are deducted directly from payroll, and these deductions are known as “deferrals.” The employer offers investment options for employees, such as stock or bond mutual funds, an insurance company annuity or, for church employees, a retirement income account.
While the 403(b) was originally a tax-sheltered annuity plan and is still referred to that way, the IRS has opened up investing options for employers. As with traditional IRAs, 403(b) account withdrawals are mandatory by age 70 1/2.
Annual Contribution Limits
For tax year 2019, a person may contribute up to $6,000 to a traditional or Roth IRA, or $7,000 if they are over 50. (These totals represent a total annual contribution to Roth IRAs and traditional IRAs.) With IRAs, you must earn at least that amount of income to contribute the maximum amount. There is an exception with the spousal IRA, in which the spouse does not have to earn income, but the couple earns that much when married and filing jointly.
For tax year 2019, employees may make an elective deferral of up to $19,000 to a 403(b) account. Those employees over age 50 may make an additional “catch-up” contribution of $6,000.
Some plans may offer catch-ups for employees with at least 15 years’ experience. This limit is the lesser of $3,000; $15,000, reduced by the amount of additional elective deferrals made in previous years due to this rule or $5,000 times the number of the worker’s years of service, minus all elective deferrals made for previous years. The annual additions limit is $56,000.
About Plan Rollovers
An employee leaving the educational, religious or nonprofit system may rollover their 403(b) into a traditional IRA. Should they get a job with another employer offering a 403(b) plan, they can rollover their former 403(b) into their new one.
- IRS: 403(b) Plan Basics
- IRS: Retirement Topics - 403(b) Contribution Limits
- IRS: Roth IRAs
- IRS: Traditional IRAs
- IRS: IRA FAQs - Investments
- IRS: Retirement Topics - IRA Contribution Limits
- IRS: Amount of Roth IRA Contributions That You Can Make for 2019
- IRS: 2019 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.