Whether you’re a company employee or an independent contractor, you surely want to be saving for retirement. With Americans living longer than ever, planning for your retirement now can bring you peace of mind later. While there’s no substitute for consulting with a legal professional some simple knowledge about retirement plans is invaluable.
A 401(k) plan is a retirement plan where an employee defers part of his or her current income into a tax shelter where it grows tax-free until the employee withdraws it. The employer has the discretion to match the employee’s contributions.
Annual contributions of employer and employee are generally limited to $18,000 plus another $6,000 if you are over 50 years old. The plan allows an employee to save for retirement and simultaneously reduce his or her current income tax bill. Employees are often allowed to make decisions as to the investment of these funds.
A Defined Benefit Pension Plan is a traditional pension plan that pays workers a specific monthly benefit at retirement. These plans either state the promised benefit as an exact dollar amount or specify a formula for calculating the benefit. Generally, a company funds the pension plan, and a professional money manager invests the assets of the fund.
Qualified Retirement Plans
Qualified retirement plans are described in Section 401(a) of the Tax Code. A qualified retirement plan is established by a business. The most common types of plans are profit sharing plans, defined benefit plans, and money purchase pension plans.
Your contributions to a qualified plan are not taxed until you withdraw the money. In addition, any contributions made to the plan on your behalf by your employer are tax deductible.
Individual retirement accounts (“IRAs”) are not qualified retirement plans. Traditional IRA earnings are taxed when they are withdrawn. They are also described under a different section of the Tax Code. An IRA is basically a savings account with some attractive tax breaks.
An IRA is established by an individual, not a company. Under this plan, an individual can deposit up to $5,500 of earned income a year into an IRA, or $6,500 per year if you are over 50 years old.
If an individual is not eligible to participate in a pension, profit sharing, or 401(k) plan at work, contributions to an IRA are deductible irrespective of the person’s income. If the individual or spouse is covered by a company retirement plan, he or she may lose their right to the IRA deduction as if their adjusted gross income exceeds certain levels.
A Keogh plan is a qualified retirement plan for self-employed individuals. Contributions to this plan are tax-deductible. The individual can direct the investment of the funds that are put into a Keogh, e.g., stocks, bonds, or mutual funds.
Roth individual retirement accounts (“Roth IRA”) are similar to traditional IRAs except the contributions to a Roth IRA are taxed at normal income rates. When you withdraw money from a Roth IRA in retirement, it will be tax-free.
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When you need legal help with your retirement plans or estate planning, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.
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