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  • Writer's pictureDavid J. Perrotto

Types of retirement accounts

SEP. IRA. HSA. 401K. 403B. How much should you put into your company 401k? How much money can you afford to put into an HSA? What is the difference between a Roth and a Traditional IRA? What are my limits? With so many questions, and very little to go on, I will try and demystify some of nuances in the retirement world for you.

​The government wants you to save for retirement. They rather you have money in the bank, then live off the government through other means. They even gave American's many choices for tax advantageous accounts, so that they are incentivize​d to save.

For the large majority of american's, especially those who are younger, the 401k is where you will be saving your money. Some employers even match up to a certain percentage of your income. For example, lets say you put in 5% of your income, and your employer has a 5% match. If you make 50,000 a year, you would have put in

2500, and your employer would have put in 2500 as well for you, giving you a grand total of 5000 in your 401k account for the year! It's almost like getting a free raise. These are the easiest to set up as well, because your employer did all the work already. For 2018 you can contribute up to 18,500. If you are over 50, you can add another 6000 as well.

Next there is the Traditional, Roth, Simple, and SEP IRA. You can contribute up to $5,500 a year to an IRA, and as much as $6,500 if you’re over 50. The money grows either tax deferred if it's a traditional IRA or tax free if its a Roth IRA, and you hold it for longer than 5 years, and are above 59 1/2. You can contribute to both an Traditional IRA and a 401(k), but if you’re covered by a retirement plan at work, you can’t deduct your IRA contributions from your taxable income if you earn more than $72,000 annually (for single filers) or $119,000 (married filing jointly). After earning $62,000 and $99,000, respectively, you get only a partial deduction. If you’re not covered by a retirement plan at work, you get the full deduction no matter what your income, unless you file jointly with a spouse who has a retirement plan at work.​

Roth IRAs are limited by income, no matter if you have other retirement plans. Unlike a traditional IRA, Roth IRA contributions are not limited because you can participate in your employer's retirement plan. Instead, there is an income limit for Roth IRA contributions that applies to all people who save and want to invest. For 2017, the limits to contribute directly to a Roth IRA for single filers are 118,000, with a phase out at 133,000. For married couples filing jointly, it jumps to 186,000 with a phase out of 196,000. There is many other advantages with having a Roth IRA, one thing is that it can help you diversify your tax bracket in retirement, since withdrawals are tax free( This is why it's not tax deductible). This gives you much more control over your taxable income in retirement. Roth IRAs also have no minimum distribution requirements, no maximum contribution age, and you are free to withdraw your original contributions whenever you want provided you hold it for over 5 years.​

The SEP IRA rules are similar to those of the other IRAs, but it has a few advantages to the self employed. While traditional and Roth IRAs are accounts most of us set up on our own, outside our workplaces, SEP-IRAs are tied to your job, even if you're self employed. A SEP is set up by an employer,and it permits the employer to make contributions to the SEP IRA accounts of eligible employees. The employer gets a tax deduction for contributions made, and the employee is not taxed on those contributions, though their eventual withdrawals will be taxed at their income tax rate. Remember, a self-employed person is both employer and employee in this case, so you are able fund your own account.​ How much can you put in your SEP IRA? This is the huge difference between regular IRA's and the SEP. The contribution limit for the 2017 tax year that's the lesser of 25% of the employee's income or $54,000. Let's use an easy example, if your income is $100,000, then your maximum contribution is $25,000 ($100,000 x 25%). Even for a roughly average income of $50,000, that's a hefty $12,500 per year. An advantage over 401ks with SEP IRA is the ability to be invested in a multitude of investment instruments, while the 401k is usually limited to a group of funds. Remember, contributions are made on a pre-tax basis, lowering your taxable income for the year of the contribution.​ The employer's contribution rate must be the same for all eligible employees.​

​Simple IRA are not as popular. This plan allows small employers, fewer than 100 employers, to set up IRAs with less paperwork. Employers must either match employee contributions or make unmatched contributions. An employee can contribute up to $12,500 in 2017, with an extra $3,000 allowed for those over 50.​

Finally there is the Health Savings Account, or HSA. Those with certain high-deductible

health insurance plans can save money tax-free in a HSA. You can contribute up to $3,350 a year for an individual or $6,650 for a family. If you’re 55 or older, you can contribute $1,000 more. This is a great tool for younger people to be able to save for healthcare costs in the future. You can withdraw money from your account to pay allowable medical expenses, as well as long term care. So if you think about it, you save the money tax free, grow the money tax free, and if you use it for LTC costs, you can get a tax deduction! If you don’t spend the money, it rolls over indefinitely. If you take the money out before you’re 65 for any reason besides qualified medical expenses, you will have to pay taxes and a 20 percent penalty(Unlike the IRA with 10%). ​ Once you’re 65, you can take the money out for any reason without penalty, but you have to pay income taxes on money. Or, you can use it for retiree medical expenses tax-free. HSA's are a powerful way to pay for healthcare costs later in your life, and most don't take advantage of HSA accounts should.

This gives you a great overview of all the different ways to save for retirement and how much you can put into each instrument. If any of this confuses you, don't be afraid to ask a financial advisor to help break it down and explain it to you.

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