En español | Your savings grow faster when you use every available tax break. Luckily, that doesn't take an accounting degree. All you really need to understand are the key differences among 401(k) plans, traditional IRAs, Roth IRAs, SEP-IRAs and ordinary taxable accounts.
Each of these accounts has different advantages and disadvantages, so it's usually a good idea to own more than one. It's also smart to review your savings options annually because, in many cases, eligibility requirements, contribution limits and tax treatment depend on your age, income and employment situation.
If your new job pays less than the old one, for example, you may now qualify for a tax-deductible IRA. Over 70 1/2 and still working? You're no longer eligible to contribute to a traditional IRA, but you may still be able to save in a Roth IRA. Earning freelance income? You qualify for a SEP-IRA (stands for Simplified Employee Pension) regardless of your age, employment status and other earnings.
Here's what you need to know:
• Your contributions cut your current tax bill by reducing your taxable income. If you earn $65,000 a year and contribute $8,000 to your 401(k), for example, you'll pay income taxes on only $57,000.
• Many employers match your contribution. Companies that do contribute typically kick in 50 cents for each dollar you save, up to 6 percent of your salary.
• You pay taxes only on your withdrawals.
• When you leave a job, you can keep your account growing untaxed by transferring it into a traditional IRA.
• Your withdrawals are subject to ordinary income taxes, plus a 10 percent early withdrawal penalty depending on your age. (The penalty is waived if you leave the job at age 55 or older; otherwise it applies until you're 59 1/2.) The tax on withdrawals means your account isn't as big as it looks. For example, if your combined federal, state and local tax bracket is 28 percent in retirement, you'll keep only 72 percent of each withdrawal.
• You must start taking minimum annual withdrawals after turning age 70 1/2. (The only exception: You're not required to take distributions from your current employer's 401(k) plan unless you own 5 percent or more of the company you work for.)
Eligibility: Full-time employees must be allowed to participate in their employer's 401(k) plan after 12 months of service if they're over age 21.
Contribution limits: The government caps 2013 contributions at $17,500, or $23,000 if you're 50 or older, thanks to the $5,500 catch-up contribution. But your plan may set lower limits.
What to consider: It's a no-brainer to contribute enough to take full advantage of your employer's match. Before deciding how much more to contribute, compare the plan to the available alternatives. If your 401(k) is mediocre due to limited investment choices, lackluster performance or high fees, you may prefer to maximize contributions to your spouse's workplace retirement plan, or to an IRA.
Next page: Are you eligible for a deductible IRA? »