There are several types of retirement accounts available to individuals, each offering unique tax advantages, contribution limits, and withdrawal rules. Here are some common types of retirement accounts:
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401(k) Plans: 401(k) plans are employer-sponsored retirement accounts that allow employees to contribute a portion of their salary to a tax-deferred investment account. Contributions are typically made through payroll deductions, and employers may offer matching contributions up to a certain percentage of the employee’s salary. Contributions to a traditional 401(k) are made on a pre-tax basis, reducing taxable income in the year of contribution, while withdrawals in retirement are taxed as ordinary income.
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Traditional IRA (Individual Retirement Account): Traditional IRAs are individual retirement accounts that allow individuals to make tax-deductible contributions to a retirement account, subject to annual contribution limits. Contributions to a traditional IRA may be tax-deductible, providing immediate tax benefits, and investment earnings grow tax-deferred until withdrawn in retirement. Withdrawals from a traditional IRA are taxed as ordinary income in retirement.
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Roth IRA: Roth IRAs are individual retirement accounts that offer tax-free growth and tax-free withdrawals in retirement. Contributions to a Roth IRA are made with after-tax dollars, meaning there are no immediate tax benefits, but qualified withdrawals in retirement, including earnings, are tax-free. Roth IRAs also offer flexibility with contributions, allowing penalty-free withdrawals of contributions at any time.
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403(b) Plans: 403(b) plans are retirement accounts available to employees of public schools, colleges, universities, and certain non-profit organizations. Similar to 401(k) plans, contributions to a 403(b) plan are made on a pre-tax basis, reducing taxable income, and investment earnings grow tax-deferred until withdrawn in retirement.
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457 Plans: 457 plans are retirement accounts available to employees of state and local governments and certain non-profit organizations. Contributions to a 457 plan are made on a pre-tax basis, reducing taxable income, and investment earnings grow tax-deferred until withdrawn in retirement. Unlike 401(k) and 403(b) plans, 457 plans may offer additional catch-up contributions for participants nearing retirement age.
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SIMPLE IRA (Savings Incentive Match Plan for Employees): SIMPLE IRAs are employer-sponsored retirement plans designed for small businesses with fewer than 100 employees. SIMPLE IRAs allow both employers and employees to make contributions, and contributions are made on a pre-tax basis, reducing taxable income. Withdrawals in retirement are taxed as ordinary income.
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SEP IRA (Simplified Employee Pension): SEP IRAs are retirement accounts designed for self-employed individuals and small business owners. SEP IRAs allow employers to make tax-deductible contributions on behalf of themselves and their employees. Contributions are made on a pre-tax basis, and investment earnings grow tax-deferred until withdrawn in retirement.
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Solo 401(k) or Individual 401(k): Solo 401(k) plans are retirement accounts designed for self-employed individuals and small business owners with no employees other than a spouse. Solo 401(k) plans offer higher contribution limits compared to other retirement accounts and may allow for both employee and employer contributions.
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Health Savings Account (HSA): While primarily used for healthcare expenses, HSAs can also serve as retirement accounts. Contributions to an HSA are tax-deductible or pre-tax, and investment earnings grow tax-free. Withdrawals for qualified medical expenses are tax-free, and after age 65, non-medical withdrawals are taxed as ordinary income without penalty.
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Defined Benefit Plans: Defined benefit plans, also known as pensions, are retirement plans offered by some employers that provide a specific monthly benefit to employees upon retirement. Pension benefits are typically based on factors such as salary history and years of service.