Retirement accounts are qualified plans, meaning are qualified for special tax treatment and can be broken down in a couple of ways.
- Individual vs. Company-Sponsored Accounts:
- Company-Sponsored: Includes 401(k)s, 403(b)s, 457 plans, profit-sharing plans, deferred compensation plans, and pensions. These are managed by your employer and may include features like matching contributions (free money you should take advantage of!).
- Individual: Includes Traditional IRAs, Roth IRAs, and deferred annuities. These are accounts you set up and manage independently.
- Traditional vs. Roth Accounts:
- Traditional: Taxes are deferred until you withdraw funds in retirement. You pay taxes on the harvest (future withdrawals).
- Roth: Taxes are paid upfront, so withdrawals (including growth) are tax-free later. You pay taxes on the seed (initial contributions).
Most company-sponsored plans are traditional, however many now also offer ROTH options inside the plan.
Key points:
- Withdrawals before age 59½ from any “qualified” plan come with tax penalties, although some exceptions are available for certain situations such as education expenses or hardships.
- Contribution limits and tax rules vary by account type.
- Required minimum distributions (RMDs) for traditional accounts begin at age 73.
If you’re unsure about your options or need help understanding your retirement accounts, reach out for personalized advice.