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.
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to make mandatory withdrawals will cost the account owner a 50 percent penalty on the amount that should have been withdrawn.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 2018 a single person with an adjusted gross income of up to $63,000 may deduct their full contribution. If earning up to $73,000, a partial deduction is permitted. Married couples filing jointly may have an AGI of up to $101,000 and take a full deduction, and a partial deduction up to an AGI of $121,000.
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 2018, single people with an AGI of up to $120,000 may make a full Roth IRA contribution, and a partial contribution until the AGI reaches $135,000. For married couples filing jointly, those with an AGI of up to $189,000 may contribute fully and may make partial contributions up to a $199,000 AGI.
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.
For 2018, a person may contribute $5,500 to a traditional or Roth IRA, or $6,500 if they are over 50. 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 403(b) accounts, an employee may make an elective deferral of up to $18,500. 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 $55,000.
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.
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