How to Choose your Retirement Pension Plan?(1)

How to Choose your Retirement Pension Plan?

This article does not have any financial effect. If you have any questions, please consult with a professional.

In-depth understanding of 401K, IRA and Roth IRA

【401K (company retirement pension plan)】

A deferred tax pension plan created in 1981, the relevant provisions are found in article 401 of the national tax law, therefore called 401K. The 401K applies to employees of private companies. It is a supplementary pension scheme for companies with a certain capital invested jointly by employers and employees. It has become the largest retirement plan for employees of private companies in the United States. The employer will create a 401K account for each employee. The employee can allocate a certain percentage of salary each month (approximately 1% to 15% of the salary, without exceeding the upper limit). The employer will pay the employee a certain amount of money. 401K account. The money invested in the 401K account does not need to be taxed. It is only when the employee receives income at the specified age that he is required to declare personal income tax.

● Annual deposit limit: the upper limit in 2018 is $ 18,500, or $ 24,500 if you reach the age of 50 (adjusted annually for inflation)

● Participation qualification: the company has a supplier and there is no special income restriction

● Advantages: payment of deferred tax, exemption from deposit interest, dividends and tax on investment income in the account

● Minimum extraction age limit: you can withdraw after 59.5 years, there will be a 10% fine

● Mandatory withdrawal age: after reaching the age of 70.5 years, part of the funds must be withdrawn each year and can no longer be deposited, otherwise a fine will be imposed (this objective is mainly to stimulate consumption).

● Special conditions which can be withdrawn in advance: paying huge medical costs / being a disabled person / being unemployed for 12 weeks can claim health insurance / death / resignation premiums from account holder, dismissal, dismissal or early retirement after the age of 55.

● You can apply for a loan on your 401K account, but the downside is that you have to pay two taxes (the income returned to the 401K account is after-tax income, and you will have to pay it again when you withdraw in the future. ), and the interest on the loan cannot be deducted. However, interest on bank loans is tax deductible.

● The 401K account belongs to the employee. Upon leaving the company, the employee can make a transfer to their own IRA account or transfer to the designated 401K plan fund company from the following company.

【IRA (Individual Retirement Account)】

The full name of the IRA is Individual Retirement Account, which is another category of pension account other than 401K. Regardless of whether or not they have participated in other pension plans, anyone with income is allowed to open an IRA account with the financial institution that created the IRA fund. The amount deposited is tax deductible, but income tax must be paid upon withdrawal. The IRA account has a good transfer mechanism. Employees can transfer funds from the 401K plan to the IRA account when they change jobs or retire, to avoid unnecessary losses.

● Annual deposit limit: in 2018, the deposit limit is $ 5,500 for those under 50 and $ 6,500 for those over 50 (adjusted annually for inflation).

● Conditions of participation: people with taxable income and under the age of 70.5 can participate. If the spouse has no income, he can also create a joint IRA account or a joint account.

● Advantages: Deferred tax payment, exempt from deposit interest, dividends and income tax on investment in the account.

● Minimum age limit for withdrawal: only 59.5 years or more can be offered, otherwise there will be an additional fine of 10%.

● Mandatory withdrawal age: after reaching the age of 70.5 years, the minimum withdrawal funds must be withdrawn each year and can no longer be deposited, otherwise a fine will be incurred.

● Special conditions which can be withdrawn in advance: paying huge medical bills / being disabled / being unemployed for 12 weeks can withdraw the health insurance / death premiums of the account holder / deposit for the first purchase If you don't own a house for two years, you can withdraw money from the IRA / Roth IRA to pay for the first purchase, but the lifetime limit for each person is 10,000 yuan) / miscellaneous expenses for Higher Education.

● Annual filing deadline: around April 15. (If the tax return is for 2017, the deadline is 04/17/2018)

【Roth IRA (Individual Retirement Account)】

A bill originated in 1997 by a senator named Roth. Similar to traditional IRAs, the biggest difference is when taxes are paid, allowing the public to make more personal choices and arrangements based on income and employment status. Roth IRA must pay personal income tax upon deposit (the amount of the deposit is not deductible), and no tax is required upon withdrawal (profits from investments are not taxable).

● Annual deposit limit: in 2018, the deposit limit is $ 5,500 for those under 50 and $ 6,500 for those over 50 (adjusted annually for inflation).

● Eligibility: there is no age limit, but there is an income limit: the 2018 annual personal income exceeds $ 135,000 or the family's annual income exceeds $ 199,000 cannot apply for Roth IRA.

● Advantages: exemption from deposit interest, dividends and income tax on investment in the account.

● Minimum withdrawal age limit: 5 years after opening and deposit, the principal of the account can be withdrawn (cannot be deposited again after withdrawal) and can be freely cashed after reaching the age of 60 years.

● Mandatory extraction age: none.

● Special conditions which can be withdrawn in advance: paying huge medical bills / being disabled / being unemployed for 12 weeks can withdraw the health insurance / death premiums of the account holder / deposit for the first purchase If you don't own a house for two years, you can withdraw money from the IRA / Roth IRA to pay for the first purchase, but the lifetime limit for each person is 10,000 yuan) / miscellaneous expenses for Higher Education.

● Annual filing deadline: around April 15. (If the tax return is for 2017, the deadline is 04/17/2018)