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retirement, you can roll the ….

retirement, you can roll the …. retirement, you can roll the ….

retirement, you can roll the money held in your 401 (k) into an IRA. Or if you join a new employer, you can roll the 401 (k) from your old employer to your new employer’s plan without paying any tax on it.

If you are self-employed, you can establish a solo 401 (k).

Among the benefits of a 401 (k) plan is the fact that the savings are automatically withdrawn from your paycheck. This takes away the temptation to spend the money one month and promise to save twice as much the next.

According to the IRS, the annual contribution limits for 401 (k) plans are subject to cost-of-living adjustments, and the new limits are published before the start of each year.

In 2022, the employee contribution limit for people under 50 is $20,500 – up from $19,500 in 2021. If your employer also contributes to your 401 (k) plan, often provided as a benefit of employment, the maximum combined limit that can be contributed to the plan for people under 50 in 2022 is $61,000 – up from $58,000 in 2021.

For retirement savers, these increases are good news. As pensions become increasingly uncommon, for most workers the proceeds of their retirement savings, plus Social Security, will be their main source of retirement income.

It’s important to note that the limits are per person and not per household. So for two working spouses, both can put the maximum amount in their 401 (k) accounts.

The primary reason to use a 401 (k) is the tax savings, which helps to build capital much more quickly. Consider that you want to save $10,000 for the year. That money will be excluded from your income for calculating your federal income tax and generally excluded from state income tax as well. If you had to pay taxes on that income, you would have less available for savings. If your income tax bracket is 22% for federal taxes, this means you would pay $2,200 of taxes on that $10,000 of income and be left with $7,800. But if you put the money in a 401 (k), the entire $10,000 goes into the plan.

Further, as long as the money remains in the 401 (k), it continues to grow tax deferred, meaning you do not pay taxes on it until you begin to take distributions in retirement. And only the money you take is taxed – the rest continues to grow tax deferred.

Individual Retirement Account

If you don’t have a 401 (k), the next place to put your money is in an Individual Retirement Account (IRA). IRAs are also tax-deferred retirement accounts, but they can be set up by individuals. Just as you get a tax deduction for money put in a 401 (k), you get a tax deduction for money put into an IRA. Similarly, the money must remain in the account until the age of 59 ½, at which point you can take the money out for retirement. If you take the money out prior to this, you must pay a 10% penalty, with some exceptions.

Relative to a 401 (k), there are two disadvantages to an IRA. The first is that there is no employer matching contribution. The second is the contribution limit, which is significantly lower than that of a 401 (k). For 2019, 2020, 2021, and 2022 the total contributions you can make each year to all of your combined IRAs can’t be greater than $6,000 if you are under 50. For those 50 and older, you can contribute an additional $1,000.


Several years ago, new legislation was passed for what are called Roth 401 (k) and Roth IRA plans. The main difference is to do with how the accounts are taxed.

With traditional plans, you can take a tax deduction for the amount contributed each year. This makes it easier to reach your saving goals for your retirement.

Once you reach retirement and the funds are distributed, you pay taxes only on the amount taken from the account.

Roth accounts work in exactly the opposite way. There are no tax deductions on the contributions to a Roth account.

This makes it harder to reach your savings goal because you have to pay taxes before you contribute. But on the receiving end, the money is distributed tax free. And no matter how large the account grows, it is not subject to any further income tax.

Traditional or Roth?

If your tax rate is the same pre and postretirement, it makes no difference whether you choose a traditional or a Roth account.

The potential advantage comes if you think you will have a different tax rate during retirement than you do today.

In a nutshell, if you think you will be in a lower tax bracket in retirement, the traditional plan is better. But if you think you will be in a higher tax bracket during retirement, the Roth is the better choice.

The presumption is that we will be in a lower tax bracket when we retire, but there are no guarantees. Expenses often decrease in retirement: You won’t be funneling money into the retirement account; child expenses are gone; and you may have paid off the house. On the other hand, perhaps you want more money for travel and recreation or need it for medical expenses. Furthermore, the tax rate may rise or fall during your retirement years.

The reality is that for most of us, we can’t be sure if we will be in a higher or lower tax bracket when we retire.

Experts say it’s a good idea to split your money between traditional and Roth accounts. If your tax rate turns out to be lower in retirement, then you got a great deal with the traditional plan; If it turned out to be higher in retirement, the Roth plan was your friend.

Taxable Accounts

If your savings goals exceed what you can contribute to your 401 (k) and your IRA, you will need to open a taxable investment account. This is basically an account you open at a brokerage firm through which you invest in mutual funds, stocks, and bonds. Compared to a 401 (k) or IRA, there is no tax deduction for money contributed, nor is there tax-deferred or free growth. You must pay interest on dividends, interest, and capital gains each year.

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