The evolution of retirement accounts in America has yielded a dizzying array of choices for taxpayers seeking to build their nest eggs. Qualified plans were introduced in 1974, which gave us pension and profit-sharing plans, 401(k) plans and other defined benefit and defined contribution plans. Individual Retirement Accounts arrived in 1982, providing those who did not have access to an employer-sponsored retirement plan, with a means of saving for retirement on a tax-deferred basis. Roth IRAs came next, in 1997, and were followed by Roth 401(k)s and 403(b)s; governmental employees will soon see a Roth option in the Thrift Savings Plan (TSP). Annuities offer yet another avenue of tax-deferred savings, outside the scope of ERISA regulations.
TUTORIAL: Roth IRAs: Introduction
Plenty of Options
The plethora of retirement savings choices that are now available, can leave those who are seeking the best option scratching their heads in dismay. Even learning the basic characteristics of each of these plans and accounts can take weeks or months, and that information alone may not be enough to point them in the right direction. Of course, there is no single option or account that is best for everyone; the right choice for each person depends upon their situation and objectives.
Self-employed taxpayers should look at IRAs and self-employed savings accounts such as SEP plans or self-employed 401(k)s. (For related reading, see What Are Some Of The Features and Benefits Of SEP IRAs And Roth IRAs?)
The best option here will probably depend largely upon the level of income of the saver. Those who want to save $20,000-$30,000 each year will need to look at the latter two options, while lower-income workers may be better off contenting themselves with contributing to a traditional or Roth IRA.
Employees who are eligible to contribute to a company plan, are usually best advised to do this first, assuming that the investment choices within the plan are at all competitive. This is especially true if the employer offers any type of matching contribution, which is often the case.
Those who will benefit substantially from a current deduction for their retirement plan contributions, may be wise to stick to traditional IRAs and qualified plans, while those who do not will probably be better off with Roth accounts.
Upper-income taxpayers with incomes that are too high to permit Roth IRA contributions, may still be able to contribute to an employer-sponsored Roth plan at work, if this is available. Highly-compensated executives who seek to make retirement plan contributions in excess of IRA and qualified plan limits, should look to non-qualified plans, such as deferred compensation or executive bonus plans.
Annuities represent another vehicle that investors of all stripes can use to save money for retirement; although money that is placed inside these contracts is not deductible, unless the annuity itself is used inside an IRA or qualified plan, there are no limits on the amount of money that may be placed inside these contracts, which also makes them popular with wealthy investors looking to shield large amounts of money from current taxation. (For related reading, see Business Owners: How To Set Up An SEP IRA.)
The Bottom Line
For more information on retirement plans and accounts, download Pub. 575 on Pension and Annuity Income and Pub. 590 on IRAs from the IRS website at www.irs.gov or consult your HR representative or financial advisor.