How to choose the best retirement savings plan

I just started my career and want to save the most I can for my retirement. What are my options and how much can I save?

We are happy to hear that saving for your retirement is a priority! Typically, the best strategy is to use as many tax-advantaged accounts as possible and then, if you need additional savings, consider other options. Tax-advantaged accounts include 401(k)s, 403(b)s, profit-sharing plans, SIMPLE IRAs, and traditional & Roth IRAs. However, unlike non-qualified investments where you are free to invest as much as you would like, retirement plan contributions are subject to specific Internal Revenue Service limitations. 

Before we dive into specific contribution limits for tax-advantaged retirement accounts, it is important to have a good understanding of how these retirement accounts work. In any account, there are three stages to an investment: the contribution stage, the growth stage, and the distribution stage. At best, you can expect to receive favorable tax treatment in two out of these three stages. For example, with a 401(k), an investor makes tax-free contributions and the investments within the account grow tax deferred. However, when a distribution from the accounts is taken, the investor must pay income taxes on that distributed amount.

The IRS is patient, but eventually it will want what it is owed. The opposite holds true for Roth IRAs or Roth 401(k)s. With these accounts, you pay the taxes upfront and then benefit from tax-free growth and tax-free distributions.

Next: Guide to 2017 contribution limits

How much can you contribute into the tax-advantaged retirement accounts available to you? The contribution limits are determined by Congress and are subject to change each year, but here is a guide to the 2017 contribution limits:

• 401(k) and 403(b) plans: These are the most popular types of retirement plans for medical practices, hospitals, and universities. The contribution limit for 2017 is $18,000. Catch-up contributions for participants age 50 and over are an additional $6,000. This allows those participants to make maximum pre-tax contributions of $24,000.
• SIMPLE (Savings Incentive Match Plan for Employees of Small Employers): The maximum allowable contribution is $12,500 with a catchup of $3,000 for those 50 and over.
• Roth IRAs: The maximum allowable contribution is $5,500 with a catchup of $1,000 for those 50 and older. However, Roth IRAs are subject to an income phase-out, and many physicians may find they earn too much to directly contribute to this type of account. Joint filers with incomes exceeding $186,000 and single filers with incomes exceeding $118,000 start getting phased out from being legally allowed to contribute to a Roth IRA and are completely phased out of contributing at $196,000 and $133,000, respectively.
• Traditional IRAs: The contribution limits are the same as a Roth IRA and while you will never be phased out of contributing to a traditional IRA, you may be phased out of the tax deduction that makes a traditional IRA a beneficial retirement savings tool. For those covered by a retirement plan at work, deductions for contributions to traditional IRAs begin to phase out at $99,000 for joint filers and $62,000 for singles and heads of households. No deductions will be allowed once income reaches $119,000 for joint filers and $72,000 for singles and heads of households. If, on the other hand, you are a joint filer who is not covered by a retirement plan at work, but have a spouse who is, then the deduction begins to phase out at $186,000, with no deduction allowed at all once income reaches the $196,000.
• Profit-sharing plans: This year employer contributions into defined contribution plans are allowable to a maximum of $54,000 with a catchup of $6,000.

What counts as a qualified education expense when taking a distribution out of the 529 account we established for our child?

Section 529 qualified tuition programs are a popular way of saving for a child’s or grandchild’s college education. If all requirements are met, nondeductible contributions to a 529 plan and any account earnings will not be taxed upon distribution if the distribution is used for qualified higher education expenses. Qualified educational expenses include tuition; room and board; books and supplies; and technology items such as computers, printers, laptops, and Internet service.

However, note that some common items do not qualify, including transportation, travel, student loan repayment, general electronics, cell phone plans, sports, fitness memberships, or health insurance. If you do use the funds for an unqualified expense, you will be subject to federal taxes on the investment earnings and a 10% penalty.

Jeff Witz, CFP and David Zemon welcome readers’ questions. They can be reached at 800-883-8555 or at witz@mediqus.com or zemon@mediqus.com.