Planning investment accounts for retirement is an important foundation for a successful retirement plan. Using the advantages provided by the different types of investment accounts can be the difference between a mediocre retirement and a well-funded retirement.
Today we are going to discuss the major investment accounts for retirement and look how they could fit into your planning.
Related Reading: Investing Principles Fundamental to Successful Outcomes
Types of Retirement Investment Accounts
Traditional 401K and 403(b)
Introduced in 1978; the 401K is an employer sponsored plan where employees make a pre-tax contribution from their wages. Sometimes employers match employee contributions up to a set limit. These contributions can be invested, but only in options provided by the employers sponsor. The contributions and earnings are not taxed until they are withdrawn after the employee becomes eligible to retire.
The contribution limit for 2014 is $17,500 for individuals under 50 and $23,000 for those 50 and older. Contributions are tax deductible and earnings grow tax-deferred until withdrawn. Withdrawal requirements begin once the owner reaches the age of 70 ½.
A 403(b) operates similarly to the 401(k) for public employees.
Introduced in 1978, the Traditional Individual Retirement Account (IRA) is an account to save for retirement with pre-tax dollars. Individuals can open an IRA in places such as mutual fund companies, brokerages, or banks. The biggest advantages to IRAs are the contributions are tax deductible (with income deduction limits ), earnings grow tax deferred until withdrawn, and the investment choices are quite liberal.
The contribution limits for 2014 are $5,500 for individuals under 50 and $6,500 for those 50 and over OR 100% of earned income, whichever is less. Required Minimum Distributions must begin once the owner reaches the age of 70 ½.
Introduced in 1998, the Roth Individual Retirement Account (IRA) is an account to save for retirement with after tax dollars. Individuals can open an IRA in places such as mutual fund companies, brokerages, or banks. Contributions and earnings compound tax-free, and unlike the Traditional IRA, are NOT taxed when withdrawn after age 59 ½ as long as the account has been open for at least five years.
The contribution limits for 2014 are $5,500 for individuals under 50 and $6,500 for those 50 and over OR 100% of earned income, whichever is less. Contributions are not tax-deductible and eligibility requirements include income eligibility based on adjusted gross income. There are no Required Minimum Distributions for the Roth IRA.
The Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is designed for self-employed individuals and small business owners. The SEP IRA rules and contributions limits are liberal, flexible, and provide a cost effective means for the self-employed business owner to save for retirement, cut taxes, and reward employees. Like other IRAs the SEP IRA offers tax deferred compounding.
Investment Accounts Planning
Investment accounts planning is an important foundation for retirement investing. Use these accounts to minimize taxes over your lifetime with deductible contributions, and deferring or growing earnings tax-free. These benefits can be just as important as the investment choices you place into these investment accounts. Take the time to learn which of these retirement investment accounts will give you the greatest benefits; then use them to build your retirement savings.
Additional Reading: Benefits of Using the AAAMP Value Investing Guide