Investors can accumulate savings in both qualified plans and nonqualified arrangements to create future retirement income.
Qualified accumulations enjoy special federal tax treatment for contributions to the account and earnings on those contributions.
Most nonqualified accumulations, by contrast, are in savings or investment vehicles that receive no special tax treatment. However, life insurance and personally owned deferred annuities do, like qualified arrangements, enjoy tax-deferred accumulation of earnings.
Employer-sponsored retirement plans established for the benefit of employees. 2 of 10
Individual Retirement Accounts or Annuities (IRAs) established by individuals on their own behalf.
Personally owned, traditional Individual Retirement Accounts and Annuities (IRAs) permit deductible contributions for some taxpayers and tax-deferred accumulations until withdrawn. Individuals may contribute to a personal IRA for themselves and an unemployed spouse, within IRS limits relating to income and age. The allowable deduction is based on the contribution made for that year.
Individuals covered by an employer retirement plan may make deductible contributions to an IRA if their incomes fall below certain thresholds. Individuals exceeding that level may not take a deduction for their contributions, but may contribute to an IRA with after-tax dollars. Accumulations are still tax deferred.
People age 50 and older may make additional “catch-up” contributions that exceed regular limits. The catch-up provision in 2015 permits a contribution of up to $1,000 above the regular limit of
$5,500 and $6,000 above the regular employer retirement plan limit of $18,000.
Contributions are typically made with after-tax dollars.
When funds are withdrawn, only the earnings on accumulations are taxed since the principal was taxed when the contribution was made.
It’s important to consider the tax consequences of savings and investment options before deciding how to build a retirement income.
Are the contributions to the fund to be made with pre-tax or after tax dollars?
Will earnings be taxed currently or deferred?
When accumulations are withdrawn, will they be fully or partially taxed or not taxed at all?
The answers can make a substantial difference in determining how much retirement income the selected strategy will create.