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Along with building your financial independence comes the responsibility of retirement planning. For many, guaranteed pension plans are not an option and Social Security isn’t enough. It’s up to you to decide what amount of money you can save now in order to provide a living well into your golden years. Here’s a look at the three most popular savings accounts: Roth IRA, IRA, and a 401(k).

401(k)

What is it?

401(k) is an employer-sponsored, deferred contribution retirement plan. Employees have the option to sign up for a 401(k) plan and choose investment options within the plan. Your company takes money out of your paycheck before income taxes are taken out and deposits this in your account. Some organizations match employee contributions up to a certain amount.

Advantages

  • Employer match is offered.
  • High annual contribution limit.
  • Contributions lower taxable income in the year they are made.
  • Eligibility is not limited by income.
  • Funds in a 401(k) may be less expensive than identical funds purchased outside of 401(k)

Disadvantages

  • No control over plan and investment costs.
  • Limited investment options.
  • Distributions in retirement are taxed as ordinary income, unless a Roth 401(k).
  • Required minimum distributions beginning at age 70 ½.

2018 Contribution limit:

$18,500 for those under age 50; $24,500 for those age 50 and above.

Traditional IRA

What is it?

A Traditional IRA (Individual Retirement Account) allows individuals to direct pretax income toward investments that can grow tax-deferred. The IRS assess no capital gains or dividend income taxes until the beneficiary makes a withdrawal. 

Advantages

  • Large investment selection.
  • If deductible, contributions lower taxable income in the year they are made.

Disadvantages

  • Contribution limits are lower than a 401(k).
  • Deduction phased out at higher incomes if you or your spouse are covered by a workplace retirement account.
  • Distributions in retirement are taxed as ordinary income.
  • Required minimum distributions beginning at age 70 1/2.

2018 Contribution limit

$5,500 as a combined IRA limit; $6,500 for those age 50 and above.

Roth IRA

What is it?

Roth IRA is a retirement account that allows you to make contributions from post-tax earnings, meaning that qualified contributions are NOT eligible to be deducted from your taxable income. The biggest benefit of a Roth IRA is that earnings can be withdrawn tax free once you turn 59 ½ years old or for other qualified expenses.

Advantages

  • Large investment selection.
  • Qualified withdrawals in retirement are tax-free.
  • Contributions can be withdrawn at any time.
  • No required minimum distributions in retirement.
  • Contributions are taxed at the time they are made.

Disadvantages

  • Contribution limits are lower than a 401(k).
  • No immediate tax benefit for contributing.
  • Ability to contribute is phased out at higher incomes.

2018 Contribution limit

$5,500 as a combined IRA limit; $6,500 for those age 50 and above.

The good news is you can use more than one of these to maximize your annual contributions. For example, if your company offers 401(k) matching, fund that first. Or, if your 401(k) does not offer a match, you can fund an IRA. Once the IRA is maxed out, begin contributions to your 401(k).

Always remember: when it comes to investing, time is your friend. Be sure to save as much as you can, as early as you can, for as long as you can.

Seattle Credit Union is not a tax advisor and does not provide tax advice. Consult a licensed tax advisor to discuss your particular tax situation and how your contributions to a 401(k), Traditional IRA, or Roth IRA effect your taxable income.