There are several options for saving for retirement, but first develop a good understanding of how these retirement accounts work to get the most out of your savings.
I just started my career and want to save the most I can for my retirement. What are my options and how much can I save?
We are happy to hear that saving for your retirement is a priority! Typically, the best strategy is to use as many tax-advantaged accounts as possible and then, if you need additional savings, consider other options. Tax-advantaged accounts include 401(k)s, 403(b)s, profit-sharing plans, SIMPLE IRAs, and traditional & Roth IRAs. However, unlike non-qualified investments where you are free to invest as much as you would like, retirement plan contributions are subject to specific Internal Revenue Service limitations.
Before we dive into specific contribution limits for tax-advantaged retirement accounts, it is important to have a good understanding of how these retirement accounts work. In any account, there are three stages to an investment: the contribution stage, the growth stage, and the distribution stage. At best, you can expect to receive favorable tax treatment in two out of these three stages. For example, with a 401(k), an investor makes tax-free contributions and the investments within the account grow tax deferred. However, when a distribution from the accounts is taken, the investor must pay income taxes on that distributed amount.
The IRS is patient, but eventually it will want what it is owed. The opposite holds true for Roth IRAs or Roth 401(k)s. With these accounts, you pay the taxes upfront and then benefit from tax-free growth and tax-free distributions.
How much can you contribute into the tax-advantaged retirement accounts available to you? The contribution limits are determined by Congress and are subject to change each year, but here is a guide to the 2017 contribution limits:
What counts as a qualified education expense when taking a distribution out of the 529 account we established for our child?
Section 529 qualified tuition programs are a popular way of saving for a child’s or grandchild’s college education. If all requirements are met, nondeductible contributions to a 529 plan and any account earnings will not be taxed upon distribution if the distribution is used for qualified higher education expenses. Qualified educational expenses include tuition; room and board; books and supplies; and technology items such as computers, printers, laptops, and Internet service.
However, note that some common items do not qualify, including transportation, travel, student loan repayment, general electronics, cell phone plans, sports, fitness memberships, or health insurance. If you do use the funds for an unqualified expense, you will be subject to federal taxes on the investment earnings and a 10% penalty.
Jeff Witz, CFP and David Zemon welcome readers’ questions. They can be reached at 800-883-8555 or at firstname.lastname@example.org or email@example.com.