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Retirement Savings

The choice of which retirement savings account can help accomplish that goal of retiring early. If you have money you can put aside now, it will be available later when you retire. If not, a Roth 401k may be a good choice (learn more here).

More: Roth 401k Guide

What Are Roth Contributions?

Roth contributions are pre-tax contributions you make to your retirement account. Roth contributions are the only types of contributions you can make to your IRA and Roth 401k at the same time.

To contribute to your Roth IRA, the IRS requires you to withhold federal income taxes from your contributions when you make them. If you don’t have tax withholding ability, you may choose to pay this tax by taking a tax credit instead of contributing.

What Do Roth Contributions Cover?

In short, the way that 401(k) contributions are treated for tax purposes depends on whether you are covered by an employer-sponsored retirement plan.

Retirement Plans

If you are a federal employee, you may be covered by an “exempt plan.” This plan is typically a federal or state government plan that offers retirement benefits that you can’t get through any other source. For more information, see Appendix B. If you are covered by an exempt plan, you must have made contributions to that plan and it must have been a part of your employment. For example, you would have made contributions to an exempt plan if you were hired for your first full-time job after leaving college. You would have made contributions to an exempt plan if you were hired for your first full-time job and for the rest of your employment.

If your employer offers your retirement benefits under your company’s plan and you are covered by that plan, and if you are entitled to Social Security benefits under your own plan (unless you have been given a reduced retirement age), then you must have made at least 100 percent of your employer’s total contributions into the employer’s plan. For example, if your employer made $5,000 of employer contributions into your employer’s plan and you were covered by your own plan, you would have made $6,000 of employer contributions into your own plan. Thus, you would have made all 100 percent of your employer’s contributions.

If you are covered by both an employer and an employee plan, make all contributions required to obtain benefits under your plan and also make all employer contributions. If an employee of your company makes a contribution to a retirement plan, you must make the same amount of contributions to the plan. You may also have to pay an additional fee of 1 percent of the contribution that is not taken into account for your health insurance benefit under the plan. You may be able to take this additional fee on the account you contribute to the plan. For more information on the plan contribution, see Revenue Procedure 2011-62. See Section 1026(c)(3)(ii) of the Affordable Care Act, for an exception to this rule that allows you to deduct the annual fee.

For information on how to calculate the fee, see the instructions for Form 1040NR, Installment Payment Statement, and Figure A. If you choose to receive health insurance benefits from your employer through a group health plan, you must reimburse your employer for 100 percent of the health insurance premiums you pay under the plan. If you do not have health insurance coverage through your employer, you cannot deduct the cost of health insurance premiums from your tax return.

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