Reading 2021-11-03


Notes from reading

They are types of investment accounts, in which you can invest in stocks, bonds, mutual funds, etc. The reason these accounts are so important is that they have significant tax advantages over regular, fully taxable accounts.

Taxable Accounts

  • Interest that you receive is taxed as ordinary income
  • Most dividend income is taxed at a maximum tax rate of 20%
  • Capital gains are taxed at a maximum rate of 20% if you’ve held the asset for more than one year, and taxed at your ordinary income tax rate if you’ve held the asset for one year or less

Individual Retirement Account (IRA)

Traditional IRAs

  • tax-deduction-now, taxable-withdrawals-later structure, traditional IRAs are often referred to as tax-deferred accounts
    • Contributions made to a traditional IRA are tax-deductible, thereby decreasing your taxable income
    • Withdrawals made during retirement are taxed at your normal income tax rate
  • Restrictions
    • For 2021 and 2022, you can only contribute $6,000 if you're under 50. You can make an additional $1,000 catch-up contribution per year if you are over 50 3
    • details in book

Roth IRAs

  • You do not get a tax-deduction for contributions to a Roth IRA. Instead, any withdrawals you make during retirement are tax-free
  • Restrictions
    • The limits are the same as traditional IRAs
    • You will be hit with a 10% early withdrawal penalty if you take money out before age 59½
    • details in book

401(k) Plan

A 401(k) plan, named after subsection 401(k) of the tax code, is a retirement plan through which a private-sector employee can choose to have some of her wages/salary deposited into a tax-deferred investment account. In other words, having a 401(k) is a lot like having a traditional IRA provided by your employer.

There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they're taxed.

  • With a traditional 401(k), employee contributions are "pre-tax," meaning they reduce taxable income, but withdrawals are taxed
  • Employee contributions to Roth 401(k)s are made with after-tax income; there's no tax deduction in the contribution year, but withdrawals are tax-free

401(k) accounts have much higher contribution limits than IRAs

  • For 2021, the annual limit on employee contributions is $19,500 per year for workers under age 50, and for 2022, the limit is $20,500 per year. If you are more than 50 years old, you can make an additional catch-up contribution of $6,500 for a total of $27,000 1
  • There are also limitations to the employer's matching contribution: the combined employer-employee contributions cannot exceed $61,000 (or $67,500 for employees over 50 years old) 1
  • details in book

401(k) owners must be at least age 59½ when they start to make withdrawals. Otherwise, they usually will face an additional 10% early-distribution penalty tax on top of any other tax they owe 2

401(k) Rollovers

403(b) Plans

These plans are just like the 401(k) but are sponsored by employers for individuals who work in schools and other tax-exempt organizations. This includes teachers, professors, clergy people, doctors, nurses, government employees, and librarians.


  1. Internal Revenue Service. Retirement Topics - IRA Contribution Limits. Accessed Jan. 13, 2022.˄

  2. Internal Revenue Service. Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. Accessed Jan. 12, 2022.˄

  3. Internal Revenue Service. IRA FAQs - Distributions (Withdrawals). Accessed Jan. 12, 2022.˄