Retirement plans allow you to defer taxes on your income to save for retirement. There are multiple types of plans that fall into two categories of tax deferral and they will be explained below.
| Pre-tax plans | Post-tax plans | |
| Contributions | In these plans, your income is not taxed prior to contributing to the plan. | In these plans, your income is taxed prior to contributing to the plan. |
| Earned Interest/Dividends | Any income earned while funds are in the plan is not taxed. | Any income earned while funds are in the plan is not taxed. |
| Withdrawals | Withdrawals from the plan will be taxed as income for the calendar year in which the funds are withdrawn. | Withdrawals from the plan will not be taxed as income for the calendar year in which the funds are withdrawn. |
Defined Contribution (DC) Plans
401(k)/403(b)/457 plans – Maximum contribution of $19,500 for the calendar year (as of 2020). These types of plans have been around since 1978.
All three of these plans are very similar. This amount usually increases each year with inflation and is determined by congress.
Roth 401(k) – Since 2006
The contribution limit is the same as a regular 401(k), although contributions are done after income has been taxed. When money is taken out of the account, no tax is due.
Individual Retirement Accounts (IRA) – Max Contribution $6,000 (2020)
Traditional IRA
The Individual Retirement Account (IRA) is another form of retirement plan originally The traditional IRA is a pretax plan.
Roth IRA
Like the traditional IRA, the maximum contribution for a calendar year is $6,000 (2020). The Roth IRA is named after Senator William Roth along with Senator Bob Packwood who originally proposed the idea as an “IRA Plus.”
Other Types of Plans
Social Security
This is technically an annuity program created by the federal government, the program is largely popular for providing a steady stream of income in retirement, regardless of the ups and downs of the market. This is what makes social security income a great way to supplement your personal retirement savings.