Individual Retirement Accounts or IRAs allow you to invest a portion of your yearly earnings, tax-deferred. This means that you don’t have to pay taxes on the money earned in the account until you withdraw it. (In addition, you may be able to deduct all or part of the money you invest from your yearly income taxes). As of 2022 the maximum contribution you can make to an IRA in any given year is $6,000 (or $7,000 if you’re over 50). As of 2023, this contribution will increase to $6,500 (or $7,500 if you’re over 50.)
Roth IRAs are similar to traditional IRAs, but they money you contribute is taxed differently. You aren’t allowed to deduct your contributions from your yearly income taxes, but, as long as you leave the money in the account for at least five years and are 59 ½ when you withdraw it, you pay no taxes on the money you withdraw. Yes, that’s right, the money is free from tax!
401(k)s (named after the section of the tax code that deals with them) are retirement savings plans sponsored by employers. They allow you to contribute a portion of your income to an investment account. (Most contributions are made before taxes. Some plans allow you to contribute after tax income as well). You have a certain amount of discretion in choosing which investments to hold within your account. Many employers match their employees’ contributions and some companies are now offering a Roth 401(k). In 2023 the employee contribution limit will be $22,500 (up from $20,500 in 2022).
403(b)s are similar to 401(k)s, but designed for employees of non-profit organizations, such as charities, colleges or churches. These employers often don’t make matching contributions. 403(b)s also sometimes allow you to make “make up” contributions if you failed to contribute the maximum amount allowed for a previous year. Most of the rules are the same as those that govern a for profit company.
Make sure you get expert advice to determine which of these choices is best for you. You don’t have to face this situation alone.
There are a variety of retirement planning options that can meet your needs. Your employer funds some; you fund some. Bear in mind that in most cases, withdrawals made before age 59 1/2 are subject to a 10 percent penalty, and withdrawals usually must begin by April 1 of the year after you turn age 70 1/2. Income taxes are also due upon withdrawal in most cases. This list describes 10 of the most common options.