I specialize in tax preparation, planning, and representing taxpayers before the IRS and state tax entities. I am also a licensed Investment Advisory Representative in the Commonwealth of PA with Venn Wealth and Benefit Services LLC, a PA Registered Investment Advisor. Venn Wealth and Benefit Services LLC are not affiliated entities.
IRA, Roth IRA, 401k, 403b, old fashioned pension plan. These terms are bandied about regularly. When the stock market hits the skids, you hear the gray-haired crowd complain that "my 401k is now a 201k."
But seriously, what exactly are these things? The one thing they all have in common is that they allow an individual to save for their retirement on a deferred basis meaning, while you are working and saving the money it will not be taxed as long as it stays in that particular savings vehicle. In fact, the term itself, IRA stands for Individual Retirement Arrangement in the Internal Revenue Code and NOT Individual Retirement Account as most people think. Wanna know what the arrangement is? I told you above, while you are working and saving AND the money remains in the account, we (The IRS and State taxing bodies) will not tax it. WHEN it comes out, either early or when one retires, the devil wants his due, and my does he ever take it! You don't really have a say in the "arrangement." Like an insurance policy, it is a unilateral contract. One side writes the thing and the other agrees to it and adheres to it or chooses not to participate and all of their money is taxed as they earn it. Now or later, one or the other, take it or leave it.
The money gets in these accounts in various ways, if it's a 401k, 403b, or Simple IRA, the money gets in by a deferral of one's salary. In fact, 401(k) and 403(b) are actually sections of the Internal Revenue Code that allow the salary deferral to take place. These salary deferral plans (with the exclusion of the Simple IRA) are quite complex and have higher administrative costs than your typical standalone IRA. A significant portion of these costs are to keep the particular plan compliant with the provisions of sections 401(k) or 403(b) of the revenue code. While it may surprise you, it is easier than you might think for a plan to fall out of compliance and lose its tax favored status. To do so would likely subject the sponsoring company, one's employer, to a class action lawsuit.
For standard IRAs, known as Traditional IRAs and Roth IRAs, the money gets in typically by owners, everyday folks like us, contributing to the plan from their bank accounts via money they earned by working. If they don't have any other retirement plan in place at work, they can contribute to a Traditional IRA and deduct that amount on their tax return up to a certain amount, in 2023, that amount is $6500 plus an additional "catch up" contribution of $1000 if you are over age 50. If you have a retirement plan at your place of employment, the deductibility of the plan is typically reduced by your income as well as your spouse's income and contributions to a retirement account at work if you are married.
A Roth IRA allows for the same amounts to be contributed, but none of the Roth IRA contributions are deductible, they are all made with "after tax" money. The catch with the Roth IRA is that when you reach retirement age none of the money withdrawn will be taxed as long as the plan has been in existence for at least 5 years. Tax free at retirement, everything, contributions and earnings, as long as it's done by the rules.
This concludes part one of "What Do you REALLY Know about Retirement Plans." Stay tuned for part two where we discuss getting the money out of the plan. This is the part that is frequently done wrong and results in far too much money going to the IRS rather than retirement plan owners and next of kin.
Halas Consulting
Ph: 412-685-4285
email: chalas@vennwealth.com
www. halasconsulting.com
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