Here’s a compact way to check the pluses and minuses of some different types of retirement accounts:
Comparing the accounts
| Traditional IRA | May qualify for tax deduction. |
| Can contribute up to $5,000 for the year, or up to $6,000 if you’re 50 or older in 2009. Contributions for the previous year can be made through April 15. The same contribution limits apply to the 2010 tax year. | |
| Can take money out for qualified events without penalty. | |
| Taxed as ordinary income, which could be a tax rate as high as 35 percent, when you start taking distributions. | |
| Can start taking money out regularly at 59½. | |
| Required to start taking money out after age 70½. | |
| Can’t contribute after age 70½. | |
| Roth IRA | Can contribute up to $5,000 for the year, or up to $6,000 if you’re 50 or older in 2009. Contributions for the previous year can be made through April 15. The same contribution limits apply to the 2010 tax year. |
| No tax deduction. | |
| Can take out the money you’ve contributed at any time without penalty. | |
| Can withdraw earnings after five years for qualified events. | |
| Money not taxed when you take it out at retirement. | |
| Don’t have to take distributions at 70½. | |
| Can contribute past age 70½. | |
| Income limit: $105,000 to $120,000 for singles; $166,000 to $176,000 for married couples. | |
| 401(k) | Contributions taken out of paycheck before payroll taxes are calculated. |
| Can save up to $16,500 for the year ($22,000 if you’re 50-plus) in 2009. In 2010, minimal inflation will keep limits the same. | |
| Can retire as early as 55. | |
| Must take distributions at 70½, unless still working at same company. | |
| Can contribute past 70½. | |
| Federally protected from creditors. | |
| Limited to the plan your employer designs/selects. | |
| May or may not be able to borrow. | |
| May or may not have matching contributions from employer. | |
| Matching may be vested. | |
| SIMPLE IRA | Contributions taken from paycheck. |
| Can contribute 100 percent of income, up to $11,500 in 2009; $14,000 if you’re 50 or older. For 2010, the limits are the same. | |
| Employer matching. | |
| Immediately vested. | |
| Option for self-employed. | |
| SEP-IRA | Employees can contribute up to $49,000 for the year in 2009; the limit is the same for 2010, with annual cost-of-living adjustments for later years. |
| Functions like an IRA. | |
| Option for self-employed. | |
| No annual reporting requirements. | |
| Solo 401(k) | Can contribute 100 percent of income, up to $16,500 for tax years 2009 and 2010 ($22,000 if you’re 50-plus). |
| Additional “employer’s” contribution of up to 25 percent of yearly business revenue if incorporated (20 percent if a sole proprietor), with the 2009 cap set at $49,000 or $54,500 if age 50 or older. | |
| Option for self-employed. | |
| Additional paperwork and tax forms required. | |
| Roth 401(k) | Contributions taken out of paycheck. |
| Can save up to $16,500 for the year ($22,000 if you’re 50-plus) in tax years 2009 and 2010. | |
| No immediate tax benefit since money contributed is after-tax. | |
| Contributions still grow tax-free. | |
| Money not taxed when you take it out at retirement. | |
| Can take distributions when you reach age 59½ and have held account for five or more years. | |
| There are no income eligibility limits for Roth 401(k) plans. | |
| Federally protected from creditors. | |
| Limited to the plan your employer designs/selects. | |
| May or may not be able to borrow. | |
| May or may not have matching contributions from employer. | |
| Matching may be vested. | |
| Relatively new plan option, so not many employers offer it. | |
| A similar Roth 403(b) plan exists for workers in the nonprofit sector. |
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