There are several types of retirement accounts, each with different tax advantages, contribution limits, and benefits. Here’s a summary of the most common ones:
1. 401(k)
Type: Employer-sponsored plan.
Benefits:
Pre-tax contributions, lowering your taxable income.
Potential employer matching contributions.
Earnings grow tax-deferred until withdrawal in retirement.
Taxation: Withdrawals taxed as regular income.
2. Roth 401(k)
Type: Employer-sponsored plan.
Benefits:
Contributions made after-tax (no immediate tax deduction).
Earnings grow tax-free, and withdrawals are tax-free in retirement (if certain conditions are met).
Taxation: No taxes on withdrawals in retirement.
3. Traditional IRA (Individual Retirement Account)
Type: Personal retirement account.
Benefits:
Pre-tax contributions, potentially reducing taxable income.
Earnings grow tax-deferred until withdrawal.
Taxation: Withdrawals taxed as regular income in retirement.
4. Roth IRA
Type: Personal retirement account.
Benefits:
Contributions made with after-tax dollars.
Earnings grow tax-free, and qualified withdrawals are tax-free.
Taxation: No taxes on qualified withdrawals in retirement.
5. SEP IRA (Simplified Employee Pension IRA)
Type: Primarily for self-employed individuals and small businesses.
Benefits:
Higher contribution limits compared to traditional IRAs.
Employer contributions are tax-deductible.
Earnings grow tax-deferred until withdrawal.
Taxation: Withdrawals taxed as regular income.
6. SIMPLE IRA (Savings Incentive Match Plan for Employees)
Type: Small business retirement plan.
Benefits:
Employer and employee contributions.
Employer match or non-elective contribution.
Contributions reduce taxable income, and earnings grow tax-deferred.
Taxation: Withdrawals taxed as regular income.
7. 403(b)
Type: Retirement plan for employees of non-profit organizations, schools, and government.
Benefits:
Pre-tax contributions, lowering taxable income.
Tax-deferred growth.
Taxation: Withdrawals taxed as regular income.
8. 457(b)
Type: Retirement plan for government employees and some non-profits.
Benefits:
Pre-tax contributions.
No early withdrawal penalty before age 59½ (for certain withdrawals).
Tax-deferred growth.
Taxation: Withdrawals taxed as regular income.
9. HSA (Health Savings Account) as a Retirement Account
Type: Special savings account for medical expenses but can be used as a retirement savings vehicle.
Benefits:
Triple tax advantage: Contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are tax-free.
After age 65, non-medical withdrawals are taxed like a Traditional IRA (taxed as income).
Taxation: Medical withdrawals are tax-free; non-medical withdrawals are taxed as income after 65.
Each of these retirement accounts comes with specific rules for contributions, withdrawals, and tax treatment, so it’s important to choose based on your financial situation and retirement goals.
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