Retirement Account Options

What is an IRA?

An Individual Retirement Account (IRA) is a tax-advantaged account designed to help you save for retirement. Contributions to a traditional IRA are typically tax-deductible, meaning you can lower your taxable income in the year you contribute. The money in your IRA grows tax-deferred, and you pay taxes on the withdrawals you make during retirement.

Traditional IRAs are a good option for individuals who expect to be in a lower tax bracket during retirement than they are currently, as this allows them to potentially save on taxes when they make withdrawals.

What is a Roth IRA?

A Roth IRA is similar to a traditional IRA, but with key differences in how it is taxed. Contributions to a Roth IRA are made with after-tax dollars, meaning you do not get a tax deduction for your contributions. However, the money in your Roth IRA grows tax-free, and qualified withdrawals during retirement are also tax-free.

Roth IRAs are a good option for individuals who expect to be in the same or a higher tax bracket during retirement, as they can benefit from tax-free withdrawals when they need the money the most.

Key Differences Between Traditional IRA and Roth IRA

Tax Treatment: Traditional IRAs offer tax-deferred growth with tax-deductible contributions, while Roth IRAs offer tax-free growth and tax-free withdrawals.

Income Limits: Roth IRAs have income limits that determine eligibility, while traditional IRAs do not have income limits for contributions.

Required Minimum Distributions (RMDs): Traditional IRAs require RMDs starting at age 73, while Roth IRAs do not require withdrawals during the account holder's lifetime.

What is a 401(k) Plan?

A 401(k) is a retirement savings plan offered by many private employers. Employees can contribute a portion of their salary to the plan, often with employer matching. Contributions are made pre-tax, reducing your taxable income for the year, and the money grows tax-deferred until withdrawn in retirement.

What is a 403(b) Plan?

A 403(b) plan is similar to a 401(k) but is available to employees of public schools, certain non-profit organizations, and ministers. Like a 401(k), it allows pre-tax contributions and tax-deferred growth, often with employer matching.

What is a Rollover?

A rollover occurs when you transfer funds from one retirement account to another, such as from a 401(k) or 403(b) into an IRA. Rollovers are typically done when changing jobs to consolidate retirement accounts and maintain the tax advantages.

Direct rollovers, where funds move directly from one account to another, avoid tax penalties and keep your savings growing tax-deferred. Indirect rollovers require careful handling to avoid taxes and penalties.