What Retirement Plan Option is Right For You?

Who May Contribute

Maximum Annual Contribution

Required Minimum Distributions (RMD)

Taxation of Distributions

Advantages

Traditional IRAs

As of December 2019, there is no age limit for contributors; account con-tributors must have earned income for the tax year.

$6,000 for 2021 and 2022 with an additional $1,000 catch-up contribution allowed for taxpayers at least 50 years old. Tax deductions allowed depending on reported income (MAGI, Modified Adjusted Gross Income).

Required minimum distributions generally must be started for taxpayers when they reach age 72 (70-1/2 if that age was reached before 1/1/2020).

Distributions are taxable in full if all contributions were deductible. If a portion of the account was non-deductible, the calculation of taxable amounts will include calculating the non-taxable pro-rata share of the account, which will reduce the taxable amount.

Simplicity of administration; and with new legislation, taxpayers of any age can contribute. Contributions can be made up to the original filing due date of the return. Taxpayers that are part of an employer plan may also contribute to IRAs with consideration of income limits for deductions.

Roth IRA

Taxpayers under income thresholds may contribute to a Roth IRA. Rollovers are not subject to the income limitations for annual contributions.

$6,000 for 2021 and 2022 with an additional $1,000 catch-up contribution allowed for taxpayers that are at least 50 years old. Tax deductions are not allowed for Roth IRA contributions.

No required minimum distributions at any time.

Qualified distributions are not taxable.

Lack of required minimum distributions and availability of the option to roll over traditional IRAs to Roth IRAs without regard for the income limit (specific rules to the rollover must be considered). Taxpayers that are part of an employer plan may also contribute to IRAs with consideration of income limits for deductions.

Self-Employed Pensions (SEP)

Any employer with one or more employees may contribute. Contributions must be allocated among all eligible employees if there are more than one.

$58,000 for 2021 and $61,000 for 2022; but self-employed individuals are also limited to 25% of their net earnings from self-employment. Self-employed individuals that are part of an employer plan through a second job need not reduce the maximum employer contribution by amounts contributed by the second employer.

Elective Deferrals: There are no elective deferrals, and contributions are not required by the employer every year.

Required minimum distributions generally must be started for taxpayers when they reach age 72 (70-1/2 if that age was reached before 1/1/2020).

Distributions are taxable in full if all contributions were deductible. If a portion of the account was non-deductivle, the calculation of taxable amounts will include calculating the non-taxable pro-rata share of the account, which will reduce the taxable amount.

Allows for a significant contribution limit for high-dollar, self-employed income businesses with reasonably simple administration. Contri-butions can be made up to the tax return filing due date. The contributions are not counted against the Traditional and Roth IRA limit for the year. The contributions to the SEP Plan are not reduced by the amount contributed to SIMPLE IRAs, assuming one is not the owner of the business that holds the SIMPLE Plan.

Savings Incentive Match Plans for Employees (SIMPLE IRA)

All employees who received at least $5,000 in compensation during any 2 preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, are eligible to participate in the SIMPLE IRA plan for the calendar year.

$13,500 for 2021 and $14,000 for 2022. Individuals 50 years of age and older can contribute an additional $3,000 catch-up contribution.

If a taxpayer is part of more than one salary deferral plan, total employee contributions cannot exceed the limit stated above.

The employer must match each employee's salary deferral up to 3% or make nonelective contributions of 2% of the employe's wages. The employer may reduce the deferral to 1%, but only for 2 of 5 tax years, while making notification to the employees within IRS regulations.

Required minimum distributions generally must be started for taxpayers when they reach age 72 (70-1/2 if that age was reached before 1/1/2020).

Distributions are taxable in full if all contributions were deductible. If a portion of the account was non-deductible, the calculation of taxable amounts will include calculating the non-taxable pro-rata share of the account, which will reduce the taxable amount.

The contributions are not counted against the Traditional and Roth IRA limit for the year. The contributions to the SIMPLE IRA are not reduced by the amount contributed to SEP Plans, assuming one is not the owner of the business that holds the SIMPLE Plan.

401(k) Plan

Any employee that is part of a qualified plan, as designated by IRS regulations.

$19,500 for 2021 and $20,500 for 2022. Individuals 50 years of age and older can contribute an additional $6,500 catch-up contribution.

If a taxpayer is part of more than one salary deferral plan, total employee contributions cannot exceed the limit stated above.

Combined employer and employee contributions cannot exceed $58,000 for 2021 and $61,000 for 2022 and must be made within the taxable year.

Self-employed individuals are limited to income from self-employment.

Individuals who are active participants in a qualified plan may be able to contribute and deduct contributions to a traditional IRA, depending on income thresholds.

Required minimum distributions generally must be started for taxpayers when they reach age 72 (70-1/2 if that age was reached before 1/1/2020).

Distributions are taxable in full if all contributions were deductible. If a portion of the account was non-deductible, the calculation of taxable amounts will include calculating the non-taxable pro-rata share of the account, which will reduce the taxable amount.

Owner/employees can make significant contributions to their retirement, assuming total contributions follow IRS regulations that avoid contribution discrimination rules.