Traditional IRA Archives - Rocky Mountain Financial Solutions

Know Your Account Types – There is a Big Difference

jim 401k, 529 Plan, College Savings, family wealth management, Financial advisor, Investing, qualified account, qualified plan, retirement, Retirement Planning, Roth IRA, Saving for College, Traditional IRA, wealth management October 13, 2020October 13, 2020401K, College Savings, financial advisor, Investing, non-qualified account, retirement planning, Roth IRA, Saving for College, traditional IRA

There are two broad categories of plan types: qualified and non-qualified. Within these groups are a number of important accounts that can help you achieve your financial goals. If you know your account types, you can better understand the advantages and disadvantages. Let’s take a quick look at each one.

Qualified Accounts

Traditional Individual Retirement Account (“IRA”)

IRA accounts are often the core account for retirement savings. Contributions are typically tax-deductible, which means made with pre-tax assets. This provides a tax benefit in the current year by lowering taxable income. IRA’s are not taxed on investment growth annually. Taxation on this account occurs at the time of withdrawal. At which time in retirement, the individual will be at a lower marginal tax rate.

401k

401ks are offered through an employer. While there are important differences and similarities between IRAs and 401k accounts, the big benefit of a 401k is that your employer can also make contributions, helping you build up your retirement savings quicker.

Roth IRA

Contributions into a Roth IRA are made with after-tax dollars. Therefore, they are not tax-deductible like a Traditional IRA. Withdrawals, however, are tax-free after five years (and other important age conditions are met), which can potentially have a dramatically positive impact on the plan. As of 2020, individuals can contribute up to an annual maximum of $6,000 if you are age 49 and under, and $7,000 if you are age 50 and above.

529 Savings Plan

If saving for post-secondary education, a 529 Savings Plan is a popular option. 529 plans are sponsored by states, not the federal government. You do not have to live in the state that sponsors the plan you choose, nor does your child have to go to school in that state. What set 529 plans apart from others is that contributions grow tax-free if they are used for college.

Non-qualified accounts

Cash Account (for investments)

The most important non-qualified account type to know about is the cash account. Unlike qualified plans, a cash account does not have tax advantages, but there are also fewer restrictions. The big benefit to cash accounts is the liquidity. You can pull money out of your account at anytime without a tax penalty. However, there may be short-term and long-term capital gains taxes to consider.

A general rule of thumb is to maximize, if appropriate to your situation, qualified plans in order to take advantage of the tax benefits, before making significant investments into a cash account.

Do you think you can benefit from one of these account types? Contact me for a consultation!

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This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.

Retirement Planning Options – 401k or IRA – Which is Best?

jim 401k, Financial advisor, financial plan, Financial Planning, Investing Strategy, investment strategy, qualified account, qualified plan, retirement, Retirement Planning, Roth IRA, tax savings, Traditional IRA April 9, 2020April 9, 2020401K, retirement, retirement accounts, retirement planning, retirement plans, traditional IRA

Amid the recent market turmoil, lots of questions have risen around the best ways to save money for retirement. There are multiple retirement planning options for the individual saver. Now is a great time to re-evaluate your plan and strategy moving forward. Below I have highlighted a few of the basic accounts for retirement savings.

Similarities and Differences

The following discusses two popular retirement accounts, the 401k and the Traditional IRA. 401k’s and Traditional IRA’s are great accounts to save money for retirement. Both are similar in that the accounts grow on a tax deferred basis. Meaning once contributions are made into the account, growth and capital gains are not taxed. Another similarity is the taxation on withdrawals. When it is time to withdraw the money from the accounts, all the money taken out is taxed at ordinary income rates.

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Differences between the accounts include contribution levels. With a 401k, in 2020, an individual under the age of 50 can contribute up to $19,500. With a Traditional IRA, the max contribution amount for savers under the age of 50 is $6,000. Another difference is that with a 401k, all the contributions are eligible for a tax deduction.

With a Traditional IRA, depending on your income, you may not qualify for the deduction. The “catch-up” provision allows for savers over the age of 50 to contribute more to their accounts. In 2020, the catch-up for 401k accounts is $6,500 and $1,000 for Traditional IRA’s. The deduction amount for a Traditional IRA depends on whether you already have an employer sponsored plan, your income level, and tax filing status. So be sure to discuss available options in detail with your tax and financial professional.

Another IRA option is a Roth IRA. The Roth IRA provides tax free growth in the account, as well as, tax free withdrawals after the account owner is 59 1/2. The contribution levels are the same as the Traditional IRA, however, income levels for making contributions are much lower. For example, a “single” tax filing status in 2020, the modified adjusted gross income must be below $124,000.

Pro’s and Con’s

The pro’s of owning a 401k are the big annual contribution limits, along with the tax deduction on your contributions and tax deferred growth. The downside of a 401k account is the limited investment choices within the employer plan. Also, the entire amount of withdrawals will be taxable. The pro’s of a Traditional IRA is that you may qualify for a deduction of contributions, tax deferred growth, and the investment options are fairly wide open to most investment choices in the marketplaces within the IRS guidelines.

The downsides of Traditional IRA’s include the small contribution amount and that all withdrawals are taxable. Another downside for both 401k plans and Traditional IRA’s is that they fall under the Required Minimum Distribution guidelines of the IRS. The RMD rules require money in these accounts to be withdrawn once the account owner turns 72 years old. Without a hardship, both accounts incur a penalty tax when withdrawals are made before age 59 1/2.

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The Roth Option

The Roth IRA option provides the biggest advantage at the withdrawal phase. Money withdrawn is tax free after age 59 1/2. The downside to the Roth IRA is that there is no tax advantage with contributions. All the contributions made with after tax dollars. Another advantage to the Roth IRA is that Required Minimum Distributions do not apply. Therefore, the IRS does not force the account owner to withdraw funds at anytime.

When it comes to Retirement Planning, there are good options for individuals. I hope you learned something from this post. If you still have a question, connect with us here. Call today if you need help, want to discuss options further, or want to review your current plan alongside your goals.

Click here if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.