Pre-tax contributions – Most retirement plans are funded with what are termed ‘pre-tax contribution.’ Taxes are NOT removed from that contribution now but will be owed later, when the money is removed from the tax-deferred protection of the particular account. So if you are twenty years old and begin to save, the money contributed to the account is pre-tax, and if you didn’t begin removing it until age seventy for example, the money grows protected from tax, or tax are deferred, until you remove any or all of it. Each amount withdrawn prompt the taxes due.
First a caveat: all of these accounts have additional benefits and restrictions that cannot be addressed in this short segment. You should know that the information provided here is a very general overview of these plans and you should seek more detailed information from a financial advisor.
Here are a few of the types of accounts frequently held.
403(b)- Used by public schools and some hospitals this is a pre-tax retirement account for eligible organizations with a non-profit tax status. The plan allows for interested employees to contribute some of their money and also allows for the employer to contribute.
Traditional 401(k)- is a pre-tax retirement plan for business and their employees. It allows eligible workers to contribute pre-tax money into a retirement savings account. It also permits a ‘profit-sharing’ contribution for the firm to contribute to your account. The money is tax-deferred while it remains in the account or another account allowed, such as a Rollover IRA and taxes are not due until money is removed.
IRAs – Speaking of IRAs, there are many types. SIMPLE IRAs are retirement accounts for employers with less than one hundred employees. Traditional IRAs allow individuals to save pre-tax money on their own, or with an advisor. Rollover IRAs, which I mentioned, allow qualified monies to be rolled out while maintaining the tax-deferred status. These funds are most often rolled at separation of employment into a rollover IRA account.
Roths – One other type of IRA and retirement plan is the Roth IRA. THIS plan is different than the other plans mentioned as contributions are made with AFTER tax contributions. Distributions are tax free if taken after age 59 ½ and the Roth account has been open for at least five years.
As I mentioned earlier, there are many more details about the pros and cons of these accounts and for your particular situation you should speak to your financial advisor about the best plans for you.
Tax-deferred Roth- http://www.cnbc.com/id/101323957
Marion Syversen, MBA
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