Tax-Advantaged Retirement Accounts

Why This Matters

Tax-advantaged retirement accounts aren't just savings vehicles—they're strategic tools that determine when and how much you pay in taxes over your lifetime. You're being tested on the fundamental distinction between tax-deferred growth, tax-free growth, and pre-tax versus after-tax contributions. Understanding these mechanisms helps you advise clients on optimal account selection based on their current tax bracket, expected retirement income, and employment situation.

The accounts in this guide demonstrate core tax planning principles: timing of tax recognition, contribution limits and eligibility, and distribution requirements. Don't just memorize which account has which feature—know why someone would choose a Roth over a Traditional IRA, or why a self-employed consultant might prefer a Solo 401(k) to a SEP IRA. These comparative questions are exactly what you'll face on exam day.

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Pre-Tax Contribution Accounts (Tax-Deferred Growth)

These accounts let you contribute money before it's taxed, reducing your current taxable income. You'll pay taxes later when you withdraw funds in retirement—ideally when you're in a lower tax bracket.

Traditional IRA

• Contributions may be tax-deductible—reduces your taxable income in the contribution year, with deductibility phasing out at higher incomes if covered by an employer plan
• Taxed upon withdrawal at ordinary income rates, making this advantageous when you expect a lower tax bracket in retirement
• RMDs begin at age 73—mandatory withdrawals force taxable events regardless of whether you need the funds

401(k) Plans

• Pre-tax salary deferrals through employer-sponsored plans—contributions reduce your W-2 income dollar-for-dollar
• Employer matching contributions effectively provide free money and immediate returns on your retirement savings
• Higher contribution limits than IRAs—23,000$$ employee limit (2024) plus 7,500$$ catch-up if 50+, making these primary wealth-building vehicles

403(b) Plans

• Designed for public schools and tax-exempt organizations—functionally similar to 401(k)s but with different eligible employers
• Special 15-year catch-up provision allows employees with 15+ years of service to contribute an additional $$$3,000$$ annually
• Investment options often limited to annuities and mutual funds, unlike the broader choices in many 401(k) plans

457(b) Plans

• State/local government and non-profit employees can contribute pre-tax, with limits separate from 401(k)/403(b) plans
• No 10% early withdrawal penalty—distributions before age 59½ avoid the penalty that applies to other retirement accounts
• RMDs can be delayed if still employed with the sponsoring employer, offering flexibility other plans don't provide

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After-Tax Contribution Accounts (Tax-Free Growth)

These accounts flip the tax timing: you pay taxes now on contributions but enjoy tax-free growth and withdrawals. This structure benefits those expecting higher tax rates in retirement.

Roth IRA

• After-tax contributions with tax-free qualified withdrawals—no deduction now, but earnings grow and distribute completely tax-free
• No RMDs during the owner's lifetime—funds can compound indefinitely, making this an excellent wealth transfer vehicle
• Income limits restrict eligibility—high earners may need to use backdoor Roth conversions to access these benefits

Health Savings Account (HSA)

• Triple tax advantage—contributions are tax-deductible, growth is tax-free, and qualified medical withdrawals are tax-free
• No RMDs and unlimited rollover—unlike FSAs, unused funds accumulate year after year for long-term medical savings
• Requires high-deductible health plan (HDHP)—eligibility is tied to your health insurance coverage, not income

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Self-Employed and Small Business Accounts

Self-employed individuals and small business owners have access to accounts with higher contribution limits designed to compensate for the lack of employer-sponsored plans.

SEP IRA

• Employer-only contributions up to 25% of compensation—employees cannot make elective deferrals, only the employer contributes
• High contribution ceiling—maximum of $$$69,000$$ (2024), making this attractive for high-income self-employed individuals
• Simple administration with minimal paperwork—no annual filing requirements unlike 401(k) plans

SIMPLE IRA

• Designed for businesses with 100 or fewer employees—provides a low-cost retirement option for small employers
• Mandatory employer contributions—must provide either 2% non-elective or 3% matching contribution
• Lower contribution limits than SEP or Solo 401(k)—$$$16,000$$ employee limit (2024) makes this less attractive for maximizing savings

Solo 401(k)

• Dual contribution capacity—contribute as both employee ($$$23,000$$) and employer (25% of compensation) for maximum savings
• Highest effective contribution limits for self-employed individuals—can exceed SEP IRA contributions at lower income levels
• Roth option available—unlike SEP IRAs, Solo 401(k)s can include after-tax Roth contributions

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Government Employee Plans

Federal employees and military members have access to a specialized plan with unique features and low costs.

Thrift Savings Plan (TSP)

• Federal employees and uniformed services only—the government's version of a 401(k) with exceptionally low expense ratios
• FERS employees receive automatic 1% contribution plus matching up to 5% of salary—one of the most generous matching formulas available
• Roth TSP option available—allows after-tax contributions alongside traditional pre-tax deferrals

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Quick Reference Table

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Self-Check Questions

1. Which two accounts allow tax-free qualified withdrawals, and what key eligibility requirement differs between them?

2. A self-employed consultant earning $$$150,000$$ wants to maximize retirement contributions. Compare the maximum contribution under a SEP IRA versus a Solo 401(k)—which allows more, and why?

3. A 55-year-old state government employee needs to access retirement funds before age 59½. Which account type avoids the 10% early withdrawal penalty, and why does this exception exist?

4. Compare and contrast Traditional IRA and Roth IRA distribution requirements. How does the absence of RMDs in a Roth IRA create estate planning advantages?

5. An FRQ asks you to recommend the most tax-efficient account for someone in a high tax bracket now who expects to remain in a high bracket in retirement. Which account(s) would you recommend and what's your reasoning?