Employer-sponsored retirement savings plans
Employers may offer a retirement plan, such as a 401(k), 403(b), or 457. These plans allow employees to contribute up to $18,000 in 2017, plus an additional $6,000 if they’re aged 50 or older. There are two types of plans: traditional and Roth.
- Traditional plans feature pre-tax contributions, which are taxed at ordinary rates when withdrawn in retirement. The employee may be in a lower tax bracket once he or she retires.
- Roth plans offer after-tax contributions, but qualified withdrawals are tax free.
With either plan type, employers may elect to match part or all of the contributions that employees make to their plan. Most of these plans typically provide employees with several investment options in which to invest their contributions. Such options may include stocks, bonds, or money market investments. If they leave their company, employees can work with a financial professional to roll over the accumulated balance into an IRA or other retirement plan in a tax-free transaction. However, if they choose to physically receive part or all of their retirement account balance, they will generally have to pay taxes and, for those under age 59 1/2, penalties.
The Individual Retirement Account (IRA)
There are two types of IRAs:
- Traditional IRA
- Roth IRA
The primary difference between them is the tax treatment of contributions and distributions (withdrawals).
- Traditional IRAs may allow an income tax deduction based on the amount of a contribution, depending on the employee's income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at the employee's then-current income tax bracket, which may be lower following his or her retirement.
- Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free.
Whichever one the employee picks, he or she might consider contributing the maximum amount allowed by the IRS: $5,500 per individual, plus an additional $1,000 annually for those aged 50 and older for 2017. Note: Those limits are per individual, not per IRA.
IRA tax benefits
If the employee funds a traditional IRA and doesn’t have access to an employer-sponsored retirement plan, he or she may be able to deduct all or part of the contribution on their taxes and also may be eligible for a tax credit. Employees funding an IRA who do have access to an employer-sponsored retirement plan also may be able to deduct all or part of their contribution on their taxes, depending on how much they contributed to the employer plan.
In choosing between a traditional and a Roth IRA, employees can weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement. For example, if an employee needs the immediate deduction this year -- and if they qualify for it -- then he or she may wish to opt for a traditional IRA. On the other hand, those who don't qualify for the deduction might consider a Roth IRA.
AXA believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource. It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your unique needs, goals and circumstances require the individualized attention of your financial professional.
Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.