Tax-Advantaged Savings Accounts

Adapted by Nicolette Lamanna

Any savings account that provides a tax benefit.
Often used for retirement savings, education expense savings, and healthcare expense savings.

Defer tax payments on amount that you contribute to an account of this nature.
Tax payments are usually then paid when money from the savings account is withdrawn.
Examples: Traditional 401(k), 403(b) plans, 457 plans, and Traditional IRA

Pay taxes before you contribute to these types of accounts.
As a result, taxes are not paid when money is withdrawn from the account and no taxes are paid on any investment earnings.
Examples: Roth 401(k)/403(b)/457 plans and Roth IRA

Usually offered by for-profit businesses to employees.
Employees choose the amount of contribution each year and how to invest the contributions.
Some employers will match employee contributions to incentivize contributions to these accounts.
To avoid paying taxes and a 10% penalty, funds cannot normally be withdrawn before the age of 59.5.
After 59.5, you can choose when to withdraw funds, but at age 70.5, the government begins to require you to withdraw funds periodically through required minimum distributions (RMDs).
Contributions are always yours even if you leave an employer.
Leaving an employer leaves you with a few options:
- Keep your money in their plan
- Move it into a new employer’s traditional 401(k)
- Roll it over into a Traditional IRA without paying taxes or penalties

403(b) and 457 plans are almost identical to 401(k) plans but differ in the type of employee they service.
403(b) plans are for employees of non-profit, tax-exempt businesses.
457 plans are for state and local government employees.
If an employer offers both a 401(k) or a 403(b) and a 457 plan, an employee can fund both accounts.

Offers similar benefits as a traditional 401(k) but differs in that this type of account is opened by the individual (you), not an employer.
Rolling over funds from an old employer’s 401(k) plan to a traditional IRA plan does not impact one’s annual contribution limits (which was $6000 in 2019 if under age 50).

Solo 401(k) plans are for self-employed individuals that can provide proof of self-employment income and for business owners that have no full-time employees.
A Roth solo 401(k) is also available.
Beneficial for workers that do not work for large employers.

Roth versions of 401(k), 403(b), and 457 plans may be offered to employees as well.

Through these accounts, you pay taxes on contributions the year that you contribute but any withdrawals (including investment earnings) after the age of 59.5 are not taxed (account must be held for at least five years prior to withdrawal).
Same annual limits as traditional counterparts.
Any matching employer contributions are placed in the traditional counterpart.

No tax deductions during the year of contribution (ie. You pay taxes that year), but no taxes are paid when money is withdrawn (including on investment earnings).

Contributions can be split between Roth and traditional IRAs, but total contributions cannot exceed annual limits.
Not subject to required minimum withdrawals (RMDs).
Can continue making contributions beyond the age of 70.5.

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