IRAs/ 401Ks/ 403B's and other deferred accounts
These accounts are tax advantaged and mostly for retirement, but have some other purposes as well.
The basic idea is to defer income now when your taxes are high until you retire when your taxes might be lower.
You get the benefit of gains on the tax deferral too .. for example if you are in the 25% federal bracket and 9% state bracket (CA) then you will be investing $1,000, rather than the approximately $667 you would have after tax to invest. The $1,000 will grow to a lot more than the $667 given many years of compounding.
For detailed information on this see publication 590 at the irs site.
These are often sold using the deferral as a selling point. As a rule these are not good investments. A currently deferred account should never be rolled into an annuity.The fees on these can be very high and you are locked into them for years.
There are times that they make sense. In that case I suggest you contact Vanguard or Charles Schwab as they have good ones with a lot of flexibility and low fees. The times that they make sense is if you get a large amount of money and will not need it until retirement. An inheiritance is a good example of this.
This is one you should get professional tax advice on. Many of the sales people for these are 'financial planners' and will tell you they are great as the commissions are very high.
If you doubt me on this ask Suze Orman or Ric Edelman, both nationally sydicated financial talk show hosts.
401K/403B/357 type accounts
These rather unusual names just refer to the section of the IRS code that allows these plans.
They allow payroll deductions which are not subject to income tax but are subject to Social Security and Medicare taxes. Having the money deducted is an easy way to save.
Many plans have some sort of match that the employer makes too. A common one is you put in 6% of your pay and the employer will match up to that amount 50% so you get a total of 9% added to your account. If you have any kind of employer match you should always take it. It is almost a guaranteed win.
The limits for contributions are pretty high for these. 15% of your salary up to $15,500 per year (more if you are over 50). This amount changes in some years so you should check with your tax advisor or the plan administrator to find out what your limits are.
You NEVER want to take money out of these accounts before you retire. If you leave the company then do a "direct rollover" to a good fund group rather than taking the distribution yourself and making the required deposit in the 60 day grace period. One day late and you not only pay the tax, but a 10% federal tax penalty and state as well (CA 2.5%).
IRAs, Individual Retirement Accounts
There are two types of these. The 'regular/contributory account' and the ROTH IRA. The contributory account may allow you to take a tax deduction for your contribution, depending on if you have a employer plan and your income. This is an area if you are unclear about this, you should check with a tax advisor. Do not always rely on financial planners for advice here, some do know the facts, some do not and a mistake can be expensive.
My advice is never make a contribution to a contributory IRA that is not deductible. It makes no sense.
Currently the limits for these are not as high as for Employer plans, but you can still contribute up to $5,000 to these each year (an extra $1,000 if over 50. These amounts change now and then so you should check with your tax advisor on this.
These are quite a bit different but have some real benefits.
You do not get a tax deferment with these, but you pay no tax on any gains in the account. There are income limits on being able to make these. The dollar limits on these are the same as for contributory IRAs.
There is also the ability to convert a regular IRA to a ROTH IRA. There are cases where this can make a lot of sense, but best to run it by a tax advisor before you do this. One time it makes sense is if you have a low income for a year, perhaps just when you retire, you are living off savings and can convert at a low tax rate.
SELF EMPLOYMENT PLANS
There are several different types of these. They are available for both the self employed and those who have a corporation and want to have a retirement plan. There are a lot of rules here, but the amounts that can be put away tax deferred are very substantial ($40K plus for some) that you should definitely look into them.