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Simplified Guide to Retirement Accounts

Simplified Guide to Retirement Accounts

| May 10, 2024

  1. What is an IRA?

An Individual Retirement Account, commonly known as IRA, is a personalized savings account for retirement. It offers many tax benefits such as tax-free or tax-deferred growth and allows individuals to put their money in various assets like stocks, bonds, mutual funds, and ETFs. There are several types of IRAs, including Traditional, Roth, Rollover, SEP, and SIMPLE. You must have earned income in order to fund an IRA, and there are various income limitations.

  1. Traditional IRA: The Basics
  • Contributions: Made with pre-tax dollars, offering tax deferral on earnings. Traditional 401ks can be rolled into an IRA in a non-taxable transaction.
  • Limits: No age restrictions for contributions, with a 2024 contribution limit of $7,000 (with an additional $1,000 for those over 50). The deduction for contributions can be limited based on income.
  • Distributions: Withdrawals can begin at age 59 ½, taking them earlier incurs a 10% penalty. Withdrawals are considered taxable income and required minimum distributions (RMDs) begin at age 73 or 75.
  1. Roth IRA: A Tax-Free Approach
  • Contributions: Made with after-tax income, providing tax-free growth. Roth 401ks can be rolled into a Roth IRA tax-free, Traditional IRAs can be converted into Roth IRAs but will create a tax liability just like an IRA distribution.
  • Limits: No age restrictions for contributions, with the same contribution limits as Traditional IRAs. Contributions are limited for higher-income taxpayers.
  • Distributions: Distributions are tax-free for the rest of you and your spouse’s life and then for 10 years in your heirs’ hands. Contributions can always be distributed tax-free; earnings can be distributed penalty-free after age 59 ½.
  1. SIMPLE IRA: A Flexible Option for Small Businesses
  • Participation: Ideal for businesses with 1-25 employees who don’t want the complexity of a (non-solo) 401k
  • Contributions: No age limits, only requiring earned income. Employers match up to 3% or offer a 2% non-elective contribution. Income limit of $345,000 for 2024. Employee contributions are capped at $16,000 (or $19,500 if over 50).
  • Distributions: Follow Traditional IRA guidelines with an additional 25% penalty if the distribution was made within 2 years of when originally participating in the plan.
  1. SEP IRA: Quick and Easy for Businesses and Self-Employed, but Second Best to Solo 401ks
  • Participation: Available to any business size or self-employed individual. However, be sure to consider a Solo 401k, as these are typically better for qualifying persons who are able to fund larger contributions.
  • Contributions: Employers make contributions equally across eligible employees based on compensation. The contribution limit for 2024 is the lower of $69,000 or 25% of the employee's compensation.
  • Distributions: Similar to Traditional IRA rules.
  1. SEP & SIMPLE Roth Contributions: A New Opportunity
  • Change: At the start of 2023, SEP and SIMPLE IRAs can now accept Roth contributions under Secure Act 2.0, although many custodians have not updated their accounts to actually allow for this as of mid-2024
  1. Solo 401(k): Tailored for Self-Employed
  • Usage: Similar to a traditional 401k, but for business owners without employees. Very easy to set up and administer, with a wide range of contribution opportunities for Roth and Traditional contributions
  • Contributions: A business owner can contribute to their Solo 401k through elective and non-elective contributions. Elective contributions are capped at 100% of their earned income, not exceeding $23,000 in 2024, plus $7,500 catch-up for over 50. Non-elective contributions can be up to 25% of their earned income. Plans can also allow for after-tax elective contributions when the “Mega Backdoor Roth” strategy is employed. Max contributions to the plan are $69,000 in 2024 plus $7,500 catch-up.
  • Distributions: Follow 401(k) guidelines, similar to IRA distribution rules.

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