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Encyclopedia > 401k ira matrix

Contents

Wikipedia does not have an article with this exact name. ... An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. ...

Summary

Roth vs. Traditional

If the investor is at lower tax bracket now than expected retirement bracket, then Roth 401k/IRA is generally preferred. If the investor is at a higher tax bracket now than expected retirement bracket, then a traditional 401k/IRA is preferred. However, the Roth versions also have early/late withdrawal advantages, as seen below.


401k vs. IRA

It is usually best to fund a 401k plan offered by one's employer up to the maximum matched contribution. After that, it is advantageous for the investor to fund a IRA due to more flexibility in investment choices. However, contributing more to a 401k is simpler and may be preferred as an easy choice for investors seeking an easy option for investing.


Comparison

Tax Year 2007 Traditional 401(k) Roth 401(k) Traditional IRA Roth IRA
Tax Implications Money is deposited as "tax deferred" and then taxed at normal income bracket for distributions Income is post tax money and no taxes have to paid under normal distributions Contributed money is at first post tax money. However, contributions are tax deductible which reduce your tax basis for that tax year. Then, distributions are taxed at the normal income for distributions Income is post tax money and no taxes have to paid under normal distributions
Income Limits Generally none, but somewhat complicated due to HCE (highly compensatend employees) rules Generally none, but somewhat complicated due to HCE (highly compensatend employees) rules Based upon MAGI; Single, HoH, MFS: full contrib to $52k, partial to $62k; MFJ; QW: full contrib to $83k, partial to $103k; can't contribute more than you make in that year Based upon MAGI; Single: full contrib up to $95k, partial contrib to $114k; Married: full contrib up to $156k, partial contrib to $166k; can't contribute more than you make in that year
Contribution Limits $15.5k/yr for under 50, $20.5k/yr for 50 and over in 2007; limits are a total of trad 401k and Roth 401k contributions. Employee and employer combined contributions must be lesser of 100% of employee's salary or $45k. $15.5k/yr for under 50, $20.5k/yr for 50 and over in 2007; limits are a total of trad 401k and Roth 401k contributions. Employee and employer combined contributions must be lesser of 100% of employee's salary or $45k. $4k/yr for age 49 or below; $5k/yr for age 50 or above in 2007; limits are total for trad IRA and Roth IRA contributions combined $4k/yr for age 49 or below; $5k/yr for age 50 or above in 2007; limits are total for trad IRA and Roth IRA contributions combined
Employer or Individual Employer sets up this plan Employer sets up this plan Individual sets up this plan Individual sets up this plan
Matching Contributions Matching contributions available from employers. Matching contributions available through employers, but they must sit in a pretax account No matching contributions available No matching contributions available
Distributions Distributions can begin at age 59 1/2 or owner becomes disabled Distributions can begin at age 59 1/2 and the account has been open for at least 5 years; there are exceptions though Distributions can begin at age 59 1/2 or owner becomes disabled Distributions can begin at age 59 1/2 as long as contributions are "seasoned" (been in the account for at least 5 years or owner becomes disabled
Forced Distributions Must start withdrawing funds at age 70 1/2 unless employee is still employed. Penalty is 50% of minimum distribution. Must start withdrawing funds at age 70 1/2 unless employee is still employed. Penalty is 50% of minimum distribution. Must start withdrawing funds at age 70 1/2 unless employee is still employed. Penalty is 50% of minimum distribution. None.
Contribution Withdrawal No, but loans from this plan are available depending upon employer's plan Yes, tax and penaly free, as long as the account has been open for more than 5 years No At any point, the owner may withdraw the total contributed into the IRA
Early Withdrawal 10% penalty plus taxes including withdrawal for hardships  ??? 10% penalty plus taxes for distributions before age 59 1/2 with exceptions Early withdrawal that is more than contributions plus seasoned conversions are subject to normal income taxes and 10% penalty if not qualified distributions
Home Down Payment Purchase of primary residence and avoidance of foreclosure or eviction of primary residence is subject to 10% penalty.  ??? Can withdraw up to $10k for a first time home purchase downpayment with stipulations Up to $10k can be used for primary home downpayment. Must not have owned a home in previous 24 months. House must be owned by IRA owner or direct linear ancestors or descendents.
Education Expenses Payment of secondary eductional expenses in last 12 months for employee, spouse, or dependents subject to 10% penalty  ??? Can withdraw for qualified education expenses of owner, children, and grandchildren Can withdraw for qualified education expenses of owner, children, and grandchildren
Medical Expenses Medical expenses not covered by insurance for employee, spouse, or dependents subject to 10% penalty  ??? Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability
Conversions  ??? Cannot be converted to a trad 401k, but upon termination of employment, can be rolled into Roth IRA Can be converted to a Roth IRA. Taxes need to be paid during the year of the conversion. Other limitations though.  ???
Changing Institutions Can roll over to another employer's 401k plan or to an (traditional?) IRA at an indepenent institution.  ??? Funds can be either transferred to another institution or they can be sent to the owner of the trad IRA who has 60 days to put the money in another institution in a rollover contribution to another trad IRA  ???
Inside The Account Capital gains, dividends, and interest within account incur no tax liability Capital gains, dividends, and interest within account incur no tax liability Capital gains, dividends, and interest within account incur no tax liability Capital gains, dividends, and interest within account incur no tax liability
Beneficiaries  ???  ???  ??? When owner dies, spouse is sole beneficiary and can roll both accounts into one Roth IRA account.
Other  ??? Still rarely offered by employers  ???  ???

 
 

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