401(k) Plan Basics

• The 401((k) plans are established by employers for employees who elect to make contributions directly from their paychecks. The money going in reduces annual income and grows deferred. Deferred growth means there are no annual tax consequences for growth as long as money stays in the account. You can buy a stock for $10 and sell it at $110 and there is no capital gain. When you take the money out, it is added to income. As of 2011, employees are allowed to contribute 100 percent of earned income up to $16,500 each year into a 401(k) plan. Employees at least 50 years of age are allowed additional catch-up contributions of $5,500. Employers can make contributions on behalf of the employee, either matching an employee's contribution or making non-elective contributions to all eligible employees. Total contributions are not to exceed $49,000 annually, including employee contributions, and must not exceed the annual income of the employee.
  
  

IRA Basics

• There are two types of IRAs a consumer can open to supplement retirement savings. The traditional IRA works similarly to the 401(k). It reduces annual income based on the contributed amount, grows deferred and has distributions added to annual income. The newer Roth IRA does not provide a deduction on income taxes. It grows deferred but distributions are tax-free if consumers meet eligibility requirements. Normal distributions from a Roth are eligible once the account is open for at least five years and when the owner turns 59 1/2. Early distributions from either IRA get a 10 percent tax penalty imposed by the IRS.
  
  

Traditional IRA Limits with 401(k)

• If you have a 401(k) plan, you will be limited as to how much you can deduct when contributing to a traditional IRA. The 2011 contributions limit is $5,000, with catch-up contributions of $1,000 for those 50 and older. To deduct the full contribution as a single tax filer, your income must not exceed $56,000. Married couples must make less than $90,000. Partially deductible contributions are allowed for single filers with income between $56,000 and $66,000 and married couples between $90,000 and $110,000. Full contributions are allowed above the range, though no deduction is permitted.
  
  

Roth IRA Limits

• The maximum contribution for a Roth IRA is the same as for a traditional IRA. Being covered by an employer plan has no effect on the Roth. If you fall below the phaseout range, a full contribution is allowed. Partial contributions are allowed in the range and no contribution is allowed above the range. The single filers range starts at $107,000 and goes up to $122,000. The range for married couples filing a joint return starts at $169,000 and goes up to $179,000. It is possible for someone covered by an employer plan make a partial contribution into a traditional IRA, take the deduction and make the rest of the contribution into a Roth as long as total annual contributions don't exceed $5,000.