Traditional IRA, Roth IRA, and 401(k)

Traditional IRA, Roth IRA, and 401(k)

Traditional IRA
 
Contributions Pre-tax earned income. $5,500 per year. $6,500 per year if over age 50.
 
Earnings Growth Tax-deferred until withdrawn.
 
Restrictions Subject to 10% tax penalty if withdrawn before age 59 ½ plus taxes owed. Few exceptions may apply.
 
Distributions Must begin RMDs by age 70 ½.
 
Investments Wide variety, few exceptions.
 
Loans Not permitted.
 
Roth IRA
 
Contributions Post-tax earned income $5,500 per year. $6,500 per year over age 50.
 
Earnings Growth Tax-free.
 
Restrictions Subject to 10% tax penalty if withdrawn before age 59 ½ plus taxes owed.   Few exceptions may apply.   Must hold for at least five taxable years before distribution.
 
Distributions No RMDs.
 
Investments Wide variety, few exceptions.
 
Loans Not permitted.
 
401(k)s
 
Contributions Pre-tax earned income. $18,500 per year. $24,000 per year over age 50 (not including match).
 
Earnings Growth Tax-deferred until withdrawn.
 
Restrictions Subject to 10% tax penalty if withdrawn before age 59 ½ plus taxes owed. Few exceptions may apply.
 
Distributions Must begin taking RMDs by age 70 ½.
 
Loans Permitted up to $50,000 if paid back within 5 years.
 

Potential exceptions for taking a penalty-free distribution from a 401(k) before reaching age 59 ½ :

  • disability.
  • unreimbursed medical expenses in excess of 10% AGI if below age 65 and 7.5% of AGI if over age 65.
  • required by court order to give the money to your divorced spouse, a child, or a dependent.
  • separation from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
  • separation from service and you have set-up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer).

Potential exceptions for taking a penalty-free distribution from a Traditional IRA before reaching age 59 ½ :

  • higher education expenses.
  • disability.
  • unreimbursed medical expenses in excess of 10% AGI if below age 65 and 7.5% of AGI if over age 65.
  • medical insurance premiums while unemployed.
  • first time home purchase up to $10,000 ($20,000 for couples) lifetime maximum.

Potential exceptions for taking a penalty-free distribution from a Roth IRA before reaching age 59 ½ :

  • higher education expenses.
  • disability.
  • unreimbursed medical expenses in excess of 10% AGI if below age 65 and 7.5% of AGI if over age 65.
  • medical insurance premiums while unemployed.
  • first time home purchase up to $10,000 ($20,000 for couples) lifetime maximum.
  • taxes owed will be paid for taking these distributions even though Roth IRAs normally grow tax-free, but the 10% penalty can be avoided.

What is an In-Service Rollover?

In-service rollovers are allowed by most 401(k) plans, which means an employee who is 59 ½ or older may continue contributing to the 401(k), maintaining all benefits including the employer match. At the same time, even though the employee is still working at the company, assets from the 401(k) may be rolled into an IRA. Therefore, the employee now has maximum contribution limits with an employer match in the 401(k), and an IRA with almost unlimited flexibility in terms of investment choices for a personalized plan.

Rollovers to an IRA from a previous employer 401(k) can be accomplished via direct transfer or distribution rollover. The direct transfer usually involves a wire or check paid directly from the 401(k) to the IRA. If a distribution is taken from a 401(k) intended to be rolled over, the participant must withhold 20% of the value until the IRA is funded, which much occur within 60 days or risk paying taxes owed plus a tax penalty.

Earned income does NOT include:

  • Property profits such as rental income, interest income, dividend income, and investment income.
  • Pension or annuity income./li>
  • Compensation payments postponed from a prior year.
  • Foreign earned income.

Required Minimum Distributions (RMDs) beginning at age 70 ½ are determined by taking the value of the tax-deferred account and dividing it by a factor which represents remaining life expectancy.

For those seeking guidance in retirement and financial planning, it is important to do your own research and proceed down a path that represents your best interests. As a fiduciary wealth advisor, Alano Massi services clients across the United States.

For a complimentary consultation, please contact:

Alano Massi, MBA, CFP®
Palm Capital Management, LLC
Direct: (805) 727-2000
Email: alano@palmcm.com

www.palmcm.com

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