Tax Advantaged Retirement Concepts

Individual Retirement Account (IRA)

An IRA is a personal savings plan that provides tax advantages for setting aside money for retirement.

Types of IRAs: 

• Traditional IRA: Contributions may be fully or partially tax-deductible in the current year, and the money grows tax-deferred. Withdrawals in retirement are taxed as ordinary income.
• Roth IRA: Contributions are made with after-tax dollars and are not deductible. Qualified withdrawals of contributions and earnings in retirement are entirely tax-free.
• SEP IRA & SIMPLE IRA: These are employer-sponsored plans for small businesses and self-employed individuals, allowing for employer and/or employee contributions with tax advantages.

 Key Features: 

• Contribution Limits: For 2026, you can contribute up to $7,500 across all your Traditional and Roth IRAs, or $8,600 if you are age 50 or older.
• Withdrawals: Generally, withdrawals before age 59½ may be subject to a 10% penalty in addition to any applicable income tax.
• Required Minimum Distributions (RMDs): RMDs from traditional, SEP, and SIMPLE IRAs generally must begin at age 73, though Roth IRAs have no RMDs for the original owner.
• You can set up an IRA with most banks, brokerage firms, or life insurance companies.

401(k) and 403(b) plan:  

• Tax Advantages: Both offer traditional (pre-tax contributions and tax-deferred growth) and Roth (after-tax contributions and tax-free withdrawals in retirement) options.
• Contribution Limits: The IRS sets the maximum total contribution limits for both plan types. For 2026, the limit is $24,500 for ages under 50. Contribution maximum for ages 50-59 is 32,500. Super catch-up for ages 60-63 is $35,750.
• Withdrawal Rules: Withdrawals before age 59½ typically incur a 10% penalty plus income taxes, with some exceptions for qualifying hardships or job separation after a certain age.
• Portability: When you leave an employer, funds can generally be rolled over into an IRA or a new employer's plan.

Defined Benefit Plans

A defined benefit (DB) plan is an employer-sponsored retirement plan, also known as a traditional pension, that provides a guaranteed, fixed monthly or lump-sum payment in retirement. The benefit is calculated using a formula based on factors like an employee's salary, years of service, and age at retirement.

Types of defined benefit plans

Traditional defined benefit plans: The most common type of plan, where benefits are determined by a formula based on salary, service, and age.

• Traditional defined benefit plans: The most common type of plan, where benefits are determined by a formula based on salary, service, and age.

• Cash balance plans: A hybrid plan that looks like a defined contribution plan to the employee, but is still a DB plan from the employer's perspective. Benefits are expressed as a stated account balance, but the employer is responsible for funding it.

Key features

• Guaranteed benefit: Provides a predictable, fixed retirement income for life.

• Employer-funded: The employer is responsible for funding the plan and managing the investments.

• Benefit formula: Retirement payments are determined by a formula, often incorporating final average salary and years of service.

• Risk: The employer, not the employee, assumes the investment risk.

• Insurance: Many private-sector DB plans are insured by the PBGC to protect against employer insolvency.

• Vesting: Employees must meet certain criteria, such as age and years of service, to become eligible for benefits.

Profit Sharing Plans: A profit-sharing plan is a retirement plan where an employer contributes a portion of the company's profits to employees' individual accounts. The employer determines the contribution amount each year, which can be a flexible and discretionary decision. Contributions can be given as cash, deferred to a retirement account, or used to purchase company stock, and the funds can be allocated to employees based on formulas like their compensation or age.

How it works

• Employer contributions: Employers decide each year whether to contribute and how much, with no legal requirement to contribute if profits are low or nonexistent. Contributions are tax-deductible for the employer.

• Employee accounts: Contributions are deposited into separate accounts for each eligible employee.

• Vesting: Employees have a vesting schedule, meaning they earn the right to keep the contributions over time.

• Distribution: Employees can access the funds after age 59½, when they are taxed as ordinary income. Some plans may allow for early withdrawals, though this is less common. 

Types of profit-sharing plans

• Cash plans: Employees receive direct cash payments.

• Deferred plans: Contributions go into a retirement account, and employees access the funds later, often at retirement. These are also known as Defined Contribution plans.

• Combination plans: A mix of cash and deferred plans.

• Employee Stock Ownership Plans (ESOPs): Employees receive shares of company stock instead of cash.