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Learn About IRAs, 401(k)s, & 403(b)s

Learn More 401(k)s and 403(b)s are retirement savings plans with special tax benefits set up by employers, IRAs by individuals.


Tax Benefits: Traditional vs. Roth Accounts

Pay Tax on Money Going Out vs. Tax on Money Going In

Traditional and Roth accounts share one important benefit. While your savings are inside one of these tax-advantaged accounts, none of the interest, dividends, or capital gains (profits from selling stocks or bonds) is taxed.

If you’re saving for retirement, it makes sense to use a tax-advantaged account.

Traditional IRAs, 401(k)s, and 403(b)s pay tax on money going out.

  • Contributions are tax deductible:  If your taxable income before contributing is $50,000 and you contribute $2,000, your taxable income after contributing is $48,000.  If you are in the 25% tax bracket, this cuts your federal income tax by $500, and usually cuts any state income tax you pay.
  • Only withdrawals are taxed, and you usually have a lower tax rate in retirement.

Roth IRAs, 401(k)s, and 403(b)s pay tax on money going in.

  • Contributions are “after-tax”: If your taxable income before contributing is $50,000 and you contribute $2,000, your taxable income remains $50,000 and you pay the same federal and state income tax.
  • Withdrawals are not taxed. So Roth accounts are attractive if you think your tax rate will be higher in retirement.

Most savings in IRAs are funds “rolled over” from 401(k)s and 403(b)s into traditional IRAs.

Investment Objectives and Options

Saving for Retirement is Serious Business

Your Retirement Savings Need to Grow & They Need to Be Safe

  • Your savings will usually grow faster if invested in stocks and stock mutual funds than if invested in bonds, bond mutual funds, or bank Certificates of Deposit (CDs).
  • But your savings are usually safer in bonds, bond mutual funds, or CDs.  And they are also safer in mutual funds than in individual stocks or bonds.
  • For more, on mutual funds, see Learn More About Mutual Funds.
  • For more on investing, see Learn More About The Best Return On Your Savings
  • For more on Target Date Funds, the most common default investment option in 401(k)s and 403(b)s, download

Rules for IRAs

For Traditional IRAs

  • You can contribute up to $5,500 a year, less any contributions to 401(k)s and 403(b)s, if you earn that much from work.  If over 50, you can contribute an additional $1,000. If over 70½, you can’t contribute.
    • Contributions are only partially deductible if your “adjusted gross income” in 2014 is over $60,000 if single, or $96,000 if married and filing jointly.  They’re not deductible at all if your “adjusted gross income” is over $70,000 or $116,000.  (These limits change every year.)
  • Before age 59½, withdrawals get hit with a 10% “penalty tax” except:
    • Up to $10,000 for a first-time home purchase.
    • “Qualified” college expenses for you, your children, or grandchildren
    • “Qualified” medical expenses greater than 7.5% of “adjusted gross income” or the cost of medical insurance if unemployed.
    • For disabled individuals.
  • Beginning at age 70½, you must make “Required Minimum Distributions” – so the government can finally tax that money!
    • “Required Minimum Distributions” are set percentages of the savings in your IRA based on age, rising from 3.6 percent in the year you turn 70½ to 11.6 percent by the time you’re 95.
    • Note that you don’t have to spend what you take out after paying the tax.  You could also save the after-tax amount.

For Roth IRAs

  • The contribution limits are the same as in Traditional IRAs.
    • But less if your “modified adjusted gross income” in 2014 is over $114,000 if single, or $181,000 if married and filing jointly. And contributions are not allowed if your “modified adjusted gross income” is over $129,000 or $191,000.  (These limits change every year.)
  • Before Age  59½ 
    • You can withdraw your contributions without paying tax  (just contributions, not any interest, dividends, or capital gains). This feature can make a Roth more attractive than a Traditional IRA.
    • Withdrawals greater than contributions get hit with a 10% “penalty tax,” with the same exceptions as in a Traditional IRA.
  • After age 59½, all withdrawals are free of tax. 

Rules for 401(k)s and 403(b)s

Generally the Same as for IRAs

The basic difference in the rules for 401(k)s and 403(b)s are the amounts you can contribute and the availability of loans in some plans.

  • You can generally contribute up to $17,500 a year to a 401(k) or 403(b), or $23,000 if over age 50.
    • Contributions and deductions for high-wage employees are limited should lower-wage employees fail to “adequately” participate in the plan, based on IRS measures of “adequacy.”
  • You can borrow from your account, if allowed by your employer’s plan, up to 50% of your account balance or  $50,000 – whichever is less, and must repay the loan within of 5 years.  But these loans have risks: 
    • If you don’t make your payments, the amount due may be taxable.
    • If you leave your employer, you typically need to pay back the loan.  And what you can’t pay back is considered a “distribution” and taxable.
  • If leaving your employer and age 55, you can withdraw funds without paying the 10% penalty tax.


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