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So Many Retirement Options, So Few Retirement Dollars
Making the Most of
Saving Incentives …While They Last
(RIVERWOODS, ILL., January 27, 2003) – While there are now more
retirement plan choices and more incentives to spur individuals to
save a little extra for retirement, trying to figure out which to use
when you have more options than money can be mind-boggling, according
to CCH INCORPORATED (CCH), a leading provider of tax and pension law
information. The main options most individuals have are contributing
to employer-sponsored plans, such as 401(k) plans, funding a
traditional IRA or funding a Roth IRA. Each of these comes with
different options and restrictions. Additional catch-up contributions
also may be made to most plans by those age 50 and older. For 2003,
the catch-up contribution allowed for an IRA is $500; for 401(k)
plans, it’s $2,000. Individuals have until April 15, 2003 to make a
contribution to an IRA, and the $500 catch-up contribution also
applies to 2002 IRAs.
"Retirement options have become a lot more complex compared to
the basic employer-funded pension plans employees of previous
generations relied on, and employees now have to be much more active
participants in planning for their retirement," said CCH Pension
Analyst Nicholas Kaster, JD, author of Saving for the Future: Roth
and Traditional IRAs.
So how do the different options compare? Below, CCH provides an
overview.
Retirement Options Comparison Chart |
|
Traditional Deductible IRA |
Traditional Nondeductible IRA |
Roth IRA |
401(k) Plan |
What is the annual per-person contribution limit? |
$3,000 for 2002-2004; increasing to $4,000 for 2005-2007; and
to $5,000 thereafter |
Same as for traditional IRAs |
Same as for traditional IRAs |
$11,000 for 2002, increasing $1,000 annually through 2006 |
Is limit indexed for inflation? |
Not until after 2008 |
Not until after 2008 |
Not until after 2008 |
Yes, after 2005 |
Are employee contributions deductible? |
Yes |
No |
No |
No
|
Can withdrawals be made tax-free? |
No. Distributions subject to tax when withdrawn |
Yes, for amounts attributable to contributions; No, for
amounts attributable to earnings |
Yes, for amounts attributable to contributions and
distributions that are: 1) held for 5 years and 2) made on or
after age 59 ½; upon death; upon disability; or for first-time
home purchase |
No. Distributions subject to tax when withdrawn |
Are loans permitted? |
No |
No |
No |
Yes, if plan permits |
Are minimum lifetime distributions required? |
Yes, after 70½ |
Yes, after 70½ |
No |
Yes, after 70½ or in the calendar year after the employee
retires |
Rollover to Roth IRAs allowed? |
Yes, with tax consequences |
Yes, with tax consequences |
Yes |
No |
Source: Saving for the Future: Roth and
Traditional IRAs,
2002, CCH INCORPORATED
Assuming the income criteria are met, one of the most difficult
decisions for investors is deciding whether to take a deduction now
and pay ordinary income taxes later – in which case they’d opt for
a traditional IRA; or forego deductions now in return for receiving
tax-free distributions later – in which case they’d opt for the
Roth IRA. However, unlike a traditional IRA, Roth IRAs do not require
any distributions be taken. Therefore, they can be a powerful estate
planning tool for individuals who don’t need the money in retirement
and whose top priority is to extend tax deferral.
"A grandmother could leave a Roth IRA to a young grandson. The
child would be required to take distributions over his life, but
because his life expectancy is quite long, the distributions would be
small and the money within the Roth IRA would continue to grow
tax-deferred," said Kaster.
While trying to choose between a traditional deductible IRA and a
Roth IRA can be difficult, it’s almost always an easier choice to
decide on funding a Roth IRA over a traditional nondeductible
IRA.
"With both types of IRAs, individuals are investing after-tax
dollars, so there’s no up-front tax benefit," said Kaster.
"However, distributions from Roth IRAs can be taken entirely
tax-free, whereas distributions from nondeductible IRAs consist partly
of nontaxable contributions and partly of taxable earnings."
Another choice facing many employees is whether to invest their
retirement dollars into employer-sponsored plans, such as 401(k) plans
– or their counterpart 403(b) plans for employees of tax-exempt
organizations and 457 programs for government workers – or into an
IRA.
Under tax law restrictions, all except lower-income employees who
participate in qualified plans are precluded from making deductible
IRA contributions. However, Roth IRAs aren’t subject to these active
participation rules. Therefore, an individual could decide to fund
both a Roth IRA and a 401(k) plan. Those with limited funds need to
decide which is best.
"401(k) plans have two major advantages: They permit larger
contributions and employers often match a portion of the investment,
which means the employee is able to fund part of their retirement with
employer-provided dollars that wouldn’t be available through a Roth
IRA," said Glenn Sulzer, JD, a senior CCH pension law analyst
specializing in 401(k) plans. "So, it’s generally a sound
strategy to first contribute to a 401(k) plan, at least up to the
highest amount that an employer will match, before making a
contribution to a Roth IRA."
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in
1913 and has served four generations of business professionals and
their clients. CCH is a wholly owned subsidiary of Wolters Kluwer
North America. The CCH web site can be accessed at cch.com.
The CCH human resources web site can be accessed at hr.cch.com.
The CCH tax and accounting destination site can be accessed at tax.cchgroup.com.
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