Retirement Accounts: an Overview

Decoding Your Retirement Plan Options

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As interesting as your job may be, you probably don't want to work at it forever. And if you save money now, it will help you meet your financial needs when you retire.

Social Security may provide you with some funds, but it was never designed to be a person's sole source of retirement money. If you want to travel instead of watching travel shows on television, you'll probably want to supplement Social Security with your own savings.

To help you accumulate the money for the things you will want to do in retirement, the government offers some tax breaks when you save money now within certain types of tax-qualified retirement accounts. Although there are a lot of different plans, they fall into a few main categories: Individual plans (Traditional and Roth IRAs) and employer plans. This article will give you an overview of the different plans so that you know where to do further research.

Individual Retirement Accounts

People saving for retirement on their own or looking to supplement an employer's plan can do so through an Individual Retirement Account (IRA). Is Your Traditional IRA Contribution Deductible?

The amount of your annual contribution to a Traditional IRA that can be deducted from your federal income taxes is dependent on two factors:

  • Whether or not you or your spouse participates in an employer sponsored retirement plan, and,
  • The amount of your modified adjusted gross income as determined on your federal income tax return.

The following scenarios should help you determine whether or not your contributions are deductible.

If you (and your spouse) are not covered by an employer sponsored retirement plan, your contributions to a Traditional IRA are fully federally income tax deductible, regardless of the amount of your modified adjusted gross income.

If you (or your spouse) are covered by employer sponsored retirement plan, your modified adjusted gross income level will determine how much of your contribution is federally income tax deductible. The following table should help you determine the deductible amount:

Allowed Deduction, Depending on Filing Status and Modified Adjusted Gross Income

Your Tax Filing Status

Tax
Year

Full Deduction

Partial Deduction

No Deduction

Single/Head of Household 2017 Up to $62,000 $61,000 - $71,000 Above $71,000
Single/Head of Household 2016 Up to $61,000 $62,000 - $72,000 Above $72,000
Married Filing Jointly 2017 Up to $99,000 $99,000 - $119,000 Above $119,000
Married Filing Jointly 2016 Up to $98,000 $98,000 - $118,000 Above $118,000
Married Filing Separately 2017 NA $0 - $10,000 Above $10,000
Married Filing Separately 2016 NA $0 - $10,000 Above $10,000

If you are married and you and your spouse file a joint income tax return, and you are not an active participant in an employer-sponsored retirement plan, but your spouse is, deductibility of your Traditional IRA contributions is dependent upon your combined modified adjusted gross income as described below

Allowed Deduction, Depending On Combined Modified Adjusted Gross Income

Tax
Year

Full Deduction

Partial Deduction

No Deduction

2017 Below $186,000 $186,000 - $196,000 Above $196,000
2016 Below $184,000 $184,000 - $194,000 Above $194,000

With a Traditional IRA plan, the money that you contribute may be deductible from your federal income taxes now. There's no tax due on the interest, dividends and capital gains earned while you hold the account, either. You will generally have to pay income taxes on withdrawals, but many people find themselves in a lower tax bracket when they are retired than when they are working. Before you turn 59½, your withdrawals generally will be subject to a 10 percent penalty tax unless they meet certain exceptions for such things as qualified medical, educational, and first-time home buyer expenses.

Roth IRA plans

Roth IRA plans are named for their champion, the late Senator William Roth of Delaware. Contributions to these accounts are not federally income-tax-deductible. However, the funds you contribute, and the earnings on them, are generally not taxed when a withdrawal is made, as long as you've owned the account for at least 5 years and attained the age of 59½.

Younger workers can withdraw the amount they put in at any time, but if they want to withdraw earnings for reasons other than death, disability, or first time home buyer ($10,000 lifetime limit), they will pay a federal income tax on any income or capital gains earned, as well as a 10 percent penalty tax.

Employer retirement plans

Employers can offer retirement plans to help attract and retain good employees. Retirement plans can help employers save money at tax time. Some types of plans allow them to offer additional tax breaks to employees as well.

In the past, many employers offered a pension, which provided a steady income after retirement. Fewer employers do that these days, instead favoring SIMPLE IRAs, SEP IRAs, or 401(k) plans (offered to employees of for-profit businesses). In a SEP IRA, the employer makes all contributions to the plan. Under the other plans, the employer may make a non-elective contribution for all employees, or it may offer to match a percentage of the funds that employees contribute.

Disclosures

Neither State Farm nor its agents provide tax or legal advice.