The best way to plan for retirement is tax deferred retirement plans. These plans are convenient as the contributions are directly deducted from your income before taxes. This means that you will not have to pay taxes on the income until you withdraw money at retirement. Most of us will be in a lower tax bracket upon retirement, thus paying less taxes on the tax deferred income. There are several excellent choices for tax deferred retirement plans.
Each plan is based on various contribution limits, tax benefits, investment alternatives, and ability to access the funds. Selections include:
- Employer Sponsored 401(k) - With this plan, you can make pre-tax contributions which are then matched by your employer. It is one of the most lucrative ways to plan for retirement, particularly, if you are able to designate the maximum amount and are good at figuring out the best investments within the plan. Participants are allowed up to $19,000 per year in 2019, with an additional $6,000 for those who are over 50 and need to make catch-up contributions. Some employers may offer a 403(b) plan which operates similarly.
- Individual 401(k) - This type of retirement planning is great for those who are self-employed. It is basically designed the same as an Employer Sponsored 401(k). It even features the employer portion pre-tax profit sharing option on up to 25% of W-2 income.
- Traditional IRA - This option has lower maximum contributions than a 401(k). However, it may be a good choice for someone who is interested in more investment alternatives or to rollover a 401(k) when leaving an employer. You can read more IRA FAQs to learn more.
- Fixed Deferred Annuities - Not taxed until withdrawals are made.
- Self-directed IRA - This type of plan is targeted towards investors who have a desire to invest outside of the traditional stocks, bonds and mutual funds. This could be precious metals, private funding, or real estate to name a few. These types of retirement plans should be approached with caution and only if you are an experienced investor. Funds used are pre-tax, untaxed on increases and taxed at withdrawal.
- Roth IRA - The contributions made to a Roth IRA are not pre-tax. However, the growth of those funds is not taxed and there is no tax on money taken out under the Roth IRA withdrawal rules.
- Whole Life Insurance Policy - Although the payments on a whole life policy are not pre-tax, the interest earned is tax-free until the policy is cashed in.
- I, EE Bonds or Variable Annuities - Interest earned is not taxed until the bonds are cashed.
While there are many interesting possibilities to plan your retirement and avoid taxation, you do want to be certain that what you are doing is not only the best decision but is also legal. Chandler & Knowles CPAs can assist you with your tax-free retirement plan. Call us today to make an appointment for advice on your current investments or to get started investing in your future: (817) 385-9158.