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Roth IRAs

• Your earnings grow untaxed.

• You can withdraw your contributions at any time, regardless of your age, without incurring a tax or a penalty.

• All Roth withdrawals are tax-free after you're over 59 1/2 and have owned the account five years.

• Your withdrawals don't count as income in the formula that determines whether your Social Security benefit is taxable.

• You're never required to take distributions, regardless of your age.

The downside:

• Your contributions don't reduce your current tax bill.

• Strict eligibility requirements — you may earn too much to contribute. In 2014, eligibility to make contributions phases out for single taxpayers with a modified adjusted gross income (MAGI) between $114,000 and $129,000, and for married taxpayers filing jointly or qualifying widows/widowers with MAGI between $181,000 and $191,000. [Check the IRS website for more details.]

What to consider: Even a modest Roth IRA can enhance your retirement security. Remember, distributions from 401(k)s and traditional IRAs are taxable. If you're in a 28 percent bracket, you'll get 72 cents to spend on living expenses for every dollar you withdraw. Taking those big distributions in a falling market can leave your nest egg too depleted to recover fully. Supplementing your income with tax-free Roth IRA withdrawals lets you trim your taxable distributions in bad times.

You can create a Roth IRA even if you earn too much to make contributions. Here's how: You can move money from a traditional IRA into a Roth IRA. This is called a Roth conversion. But when you do this, you owe taxes on the amount you convert. For example, if you move $50,000 from a traditional IRA to a Roth IRA, the conversion adds $50,000 to your taxable income for the year. To minimize the annual tax bite, you may want to convert $10,000 a year over a five-year period.


• Contributions reduce your taxable self-employment income.

• You owe taxes only on withdrawals.

• A SEP is as easy to set up as a traditional IRA.

• You can save much more than you could in a regular IRA.

• There's no age limit on contributions.

The downside:

• Withdrawals are taxed as ordinary income and subject to a 10 percent early withdrawal penalty until you're 59 1/2.

• You must start taking minimum annual withdrawals after you turn 70 1/2.

Eligibility: Any employer, including a self-employed person, can establish a SEP-IRA.

What to consider: If you have freelance income, even in retirement, contributing to a SEP-IRA can cut your tax bill. In 2014, you can contribute either 25 percent of your self-employment income or $52,000, whichever is smaller.

Taxable Accounts

• There are no age, income or contribution restrictions.

• There are no minimum required distributions.

• You can usually withdraw your contributions anytime without tax or penalty.

• If you invest in a capital asset (like stocks or real estate), your profit is taxed as a capital gain, at a substantially lower rate than ordinary income.

The downside:

• Your contributions don't reduce your taxable income.

• Your earnings are taxable.

What to consider: Many experts believe ordinary income tax rates will rise in the future. Taxable accounts also help diversify your nest egg.

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