There are specific rules for starting, contributing to and withdrawing from retirement accounts.
Retirement accounts for starting out
The main rule to consider here involves the type of retirement plan.
In a 401(k) or a 403(b), your employer must sponsor you for the plan. This isn’t a big process – it simply means that you start the plan through them. A 401(k) plan is for most “for-profit” organizations, and a 403(b) is for non-profits like schools, churches, etc.
An IRA, on the other hand, is separate from your employer. You can start an IRA plan at any financial institution that offers one.
What are the rules for contributing?
Contribution rules differ slightly in amount, and how taxes are handled we all.
For instance, Roth IRA plans and Roth 401(k) plans see contributions “post-tax”. This means that your contributions come from your paycheck after taxes, social security and the like have already been paid. Traditional IRA plans and traditional 401(k) (and 403(b)) plans see their contributions made BEFORE taxes. This is all important because if you think that you will be in a higher tax bracket during retirement, a Roth plan will benefit you more.
There are also limits to the amounts you can place in your retirement accounts. A 401(k) has a limit, as of 2018, of $18,500 per year. The IRS allows for an IRA account contributions to total $5,500 across all IRAs you hold if under the age of 50. If you are 50 or older, your IRA contributions for the year can total $6,500 max.
What about withdrawal rules?
There are different penalties and tax implications if you withdraw money from your retirement account before the age of 59½, without incurring any penalties. You can borrow money against your 401(k) (and those fees are all handle by your 401(k) administrator).
If you withdraw money BEFORE the age of 59½, there are penalties. These can include tax penalties, IRS penalties and your retirement administrator penalties. Early withdrawal of your retirement account is never a solution – and it should only ever be a last resort.
There are also recognized life events for which you are able to withdraw and the penalty can be waived. For most retirement accounts, these are clearly defined. If you run into an issue with severe health care needs, natural disaster, or similar events, your penalties might be limited, or even non-existent.
What other rules should I know?
For most retirement accounts, when you reach the age of 70½, you must begin making mandatory distributions, or withdrawals. There are some investment vehicles that this is not necessary (a Roth IRA, for instance), but for most, this is standard.
If you would like further rules concerning required minimum distributions, you can visit the IRS website.
Is there anything that you can tell me about retirement account rules?
The final, and best, advice we can give about your individualize retirement account needs is to consult your tax preparer. This will allow you to understand the impact of withdrawals and contributions on your overall financial picture.