When you’re considering opening a retirement account—or transferring your money into a different type of account—the number of options can be confusing. From 401(k)s to individual retirement accounts (IRA)s, we’ll break down the differences and help you make a detailed plan.
At Ferguson-Johnson Wealth Management, we’re here to help you sort through them so you can make the choice that’s best for your financial future.
Most people are familiar with 401(k) plans if they’re offered one through their employer, but there are actually many different types.
The money deferred into a traditional 401(k) account is usually not taxable, but Roth 401(k) plans work similarly to Roth IRA accounts—the money is taxed when it goes into the account, so it is usually tax-free when it is withdrawn.
401(k) plans are qualified, defined-contribution plans—meaning the balance in the account is determined by how much the employee contributes and the performance of the investments included in the plan.
This differs from a “defined-benefit” (pension) plan, where the employer is typically required to contribute to the balance as well.
If you leave the company who organizes your 401(k) account, you have several options:
The option you choose depends on your unique situation as well as your tax and investment needs, so you should consult with your financial advisor before making a decision.
Traditional and Roth IRAs are retirement accounts established by individual taxpayers. Typically you can contribute up to $5,500 per year to IRAs, but this may differ depending on your income, age, and filing status.
Though both types of retirement accounts can be used to effectively save for retirement, they differ in a few important ways. Keep in mind that IRAs can also be used to roll over 401(k) plans or additional retirement plans into a single account.
With traditional IRAs, contributions are tax deductible (not taxed), but eventual withdrawals are taxed as income. This only applies if you earn less than $61,000 per year as an individual and have a retirement plan available through work.
If you earn more than $61,000 but less than $71,000 each year, it’s possible that only a portion of your yearly contributions will be tax deductible. If you earn more than $71,000, your contributions are not tax deductible at all (unless you are not offered a retirement plan through your employer).
Other rules apply if you file jointly with a spouse or file as head of household, so be sure to discuss this with your financial advisor and tax advisor each year.
While contributions to Roth IRAs are not tax deductible, withdrawals (distributions) are tax-free. So, Roth IRAs are funded with after-tax dollars but earnings do not incur any income or capital gains tax upon withdrawal provided that initial contributions were made five years before the date when you start withdrawing funds.
Individuals making less than $118,000 per year can contribute up to the limit, but other income levels and filing status determine whether you can contribute a lesser amount or nothing at all to a Roth IRA. Read over information from the IRS to know for sure.
Want to learn more about how an IRA can help you save more for retirement? Contact your fiduciary advisor at Ferguson-Johnson Wealth Management.
HSAs have been gaining in popularity in recent years due to their flexibility and overall usefulness, but far fewer people take advantage of these plans than the number of people to whom they are available.
HSAs are tax-advantaged savings accounts that help those with high-deductible health plans pay for medical costs. Unlike flexible spending accounts (or “flex plans”), you don’t lose your savings in an HSA if you don’t use them in a given year. Because you can build up your balance over time, HSAs are a great way to save money that can pay for increased medical expenses as you age.
Do you have a high-deductible health plan? Call us at 301-670-0994 to discuss how an HSA fits into your financial plan.
Our retirement solutions aim to identify, plan for, and help you stay on track with your retirement goals. Our objective is to help you minimize the stress of retirement planning so that you and your family can focus on what is most important in life.
We work in close collaboration with you to develop a customized retirement plan that employs effective investment strategies to secure your wealth and manage key risks during every stage of pre- and post-retirement.
Most importantly our retirement planning process puts us with you every step of the way by providing on-going monitoring and support for your full financial picture.