A:

Congratulations on saving for retirement! In 2016, you can contribute a maximum of $5,500 (or $6,500 if you are 50 or older) to a Roth IRA.

Aside from a Roth IRA, there are a number of different retirement plans and tax-deferred savings vehicles for which you may be eligible.

The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer offers one of these plans, you can contribute up to $18,000 (or $24,000 if you are 50 or older). Many employers offer a contribution match, which is one of the best retirement investment features available.

If you have self-employment income or have your own small business, there are alternative retirement plans available to you. A SIMPLE IRA allows you to save up to $12,500 ($15,500 if you are 50 or older) in pretax dollars, and no tax is owed until you make withdrawals. Depending upon your income, you may be able to set up your own 401(k), also known as a solo or independent 401(k), or a SEP IRA. For 2016, you can then defer up to $53,000 in either of them.

Beyond defined contribution plans, depending on your age and income, it might be worthwhile to set up a defined benefit plan. These are complicated retirement plans that require significant paperwork, administration and fees. But if you earn a large amount of self-employment income and are nearing retirement, you could defer up to $210,000 per year.

As you know, a Roth IRA contribution is made with after-tax money, which means that you don’t receive a tax deduction for your contributions. But you won’t owe any taxes in the future. Other IRAs and defined-benefit plans are tax deferred, meaning you get a tax deduction at the time of making the contribution, but you will owe taxes later.

If you have exhausted all the normal tax-deferred and tax-exempt retirement accounts and are in a high tax bracket, you might want to look into annuities, which are insurance products that confer tax benefits. Annuities have a justly deserved bad reputation for high fees and poor investments options. But there are a newer class of annuities, sometimes called “investment-only” annuities, that are lower in cost. These annuities are created for tax-deferral purposes, not for insurance benefits. When you purchase them, be sure to avoid any guarantees, protections or life insurance riders. Your after-tax contributions will grow tax deferred, and there is no limit on the amount of after-tax money you can contribute. Unlike a Roth IRA, you will owe taxes on the gains at withdrawal, but you won’t owe tax on the principal.

So you have many options to choose from after you have contributed the maximum to your Roth IRA. However, your ultimate contributions may be limited by the amount and type of income you have earned and by other accounts you have contributed to, so you should check with a tax professional

RELATED FAQS
  1. What is the ideal contribution to a 401k?

    I contribute about 10% to my 401k. I want to know more about Roth IRAs. I have one with my company, but haven't contributed ... Read Answer >>
  2. How do I open a Roth IRA if my Husband and I make over $300k?

    Between my husband and I, we make around 350k to 400k a year.  ... Read Answer >>
  3. Am I eligible to contribute $6,500 to a Roth IRA or a regular IRA?

    I have been saving the max $24K in a Roth 401k. I have a salary of $225K and own a small business with about 11 employees, ... Read Answer >>
  4. Do I have to stop contributing to my second Roth IRA?

    I have a regular IRA and Roth IRA with a brokerage firm as well as a 401k Read Answer >>
  5. What are the benefits of a Roth IRA for a high income worker?

    I am a high income worker (over $250K / year). I would like to do a Roth IRA for my wife using the back door method. ... Read Answer >>
  6. What's the best kind of IRA for a 20-something?

Related Articles
  1. Retirement

    How To Use Your IRA As A Last-Minute Tax Deduction

    While some people are stressing over their taxes, there is a big advantage to delaying the process: You can maximize your 2014 contributions to your IRA.
  2. Retirement

    These IRA Contributions Will Cut Your 2015 Taxes

    No matter how you save for retirement, take advantage of the time between now and April 15, 2016, to add to your nest egg while cutting your tax bill.
  3. Retirement

    Build Your Own Retirement Plan

    A step-by-step guide to planning for your retirement. The sooner you start, the easier it will be to build a good cushion for your future.
  4. Retirement

    Maxing Out Your 401(k) vs. an IRA or Roth IRA

    What is the best way to save for retirement? Max out your 401(k)? Add an IRA? And what about the Roth? Your questions, answered.
  5. Retirement

    Want To Know How To Save For Retirement?

    Understanding how to save for retirement does not have to be complicated. Here’s what you need to know about the tax-advantaged accounts you may use.
  6. Retirement

    Save Early For Retirement If You're A High Earner

    If you earn a high income, there are many ways you can save extra money for an early retirement.
  7. Retirement

    The 4 Essential Elements of a Retirement Plan

    Learn about the four essential elements of an effective retirement plan, including maximizing your contributions and understanding your investment options.
  8. Retirement

    How to Use Your Roth IRA as an Emergency Fund

    Do you feel like you don’t have enough money to save for emergencies and also save for retirement? An often-overlooked feature of the Roth IRA could solve your problem.
  9. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  10. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
RELATED TERMS
  1. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  2. Roth IRA

    An individual retirement plan that bears many similarities to ...
  3. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  4. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  5. Retirement Contribution

    A monetary contribution to a retirement plan. Retirement contributions ...
  6. Savings Incentive Match Plan For Employees Of Small Employers - SIMPLE

    A retirement plan that may be established by employers, including ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center