Alright, let’s talk about Retirement accounts. Since @diceman asked.
First some terms:
Pretax: money put in before it’s taxed. This means a contribution to a pretax account lowers your taxable income
Post tax: money put in after it’s taxed. This means a contribution to a post tax account does not lower your taxable income, but it’s also not taxed when you take it out.
Contribution: putting money into an account
Distribution: taking money out of an account
Qualified distribution: a distribution without penalty
Unqualified distribution: a distribution with penalty
Earnings: the interest accrued in the account (basically the amount that exceeds your contributions)
This is an employer supplemented retirement account for employees. You contribute some money and they’ll match up to a certain percentage. It is a pretax account. Generally the best first option to contribute money to. Generally you can’t take money out of this account without penalty until you reach age 59.5. There may be a catch-up period as well once you reach age 50 like with IRAs, but I’m not positive. Your employer could tell you more about the specifics of your policy.
This is an individual account you have to set up somewhere yourself. This is a pretax account. There are, however, contribution limits. The limit for 2020 is $6,000 between ALL your traditional AND roth IRAs. This amount increases to $7,000 during the catch-up period beginning at age 50. The distribution rules are the same as a 401(k) with some additional restrictions. With a traditional IRA you have to start taking money out after age 70.5 and can no longer put money in. If you make a contribution after age 70.5 or exceed your contribution limit you will be subject to an additional amount. Excess contributions are taxed at 6% per year as long as the excess amount remains in the accounts.
I, unlike my “boss”, love roths. If you want to contribute money toward a retirement, but can’t stomach not being able to touch your money or want to be able to take money out when you’re retired and don’t have to worry about tax a roth is the way to go. It follows the same contribution restrictions as a traditional IRA. Unlike a tradtional IRA, however, a Roth is a post-tax account. You don’t get to lower your taxable income for the year in which you make the contribution. So why bother with one? The main benefit is you don’t pay any tax on your contributions (since they’ve already been taxed) as well as the earnings. You also don’t have to take money out ever and can always put money in.
The distribution rules are very different from the 2 previous accounts as well.
A distribution is qualified once you reach age 59.5 OR after you’ve had the account for 5 years, whichever is later (since you can open one whenever. So if you open one when you turn 55 you won’t be able to take money out until you’re 60 for example).
You can take out your contributions at any time with no penalties or restrictions. This is because a Roth is a post tax account. It will, however, result in an additional form or 2 on your return for auditing purposes.
There is no required minimum distribution unlike a traditional IRA (you have to start taking money out at 70.5)
If a distribution is qualified you pay no taxes. If it’s not, you only pay taxes on the portion of the distribution that is earnings.
So what happens when you take these out?
You get a 1099-R form. You’ll have to specify that they take out a percentage for federal (and state where applicable) income tax if it’s not from a Roth account. This gets added to your taxable income and the withholdings to the withholdings like any normal W-2 form unless it’s a Roth. If it is a Roth, then it’s added to income, just not taxable income and obviously no withholdings.
This is a simplified summary, there are many exceptions and fringe cases when dealing with retirement for tax purposes, but these are the general rules for most everyone.