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Sunday, February 25th, 2007: Page updated at 12:00 AM

Information on this chart, originally published February 25, 2007, was corrected March 2, 2007. In a previous version of this chart, we gave an incorrect figure for the 2007 401(k) contribution limit. The correct amount is $15,500 per taxpayer, or $20,500 for those 50 and older; the contribution limit rose $500 between 2006 and 2007.

SAVING FOR RETIREMENT:
TOOLS OF THE TRADE

Saving for retirement typically involves one or of more of these investment choices: Your marital status, income level and type of employer all impact how and where you should save for retirement. Some of these tax breaks are phased out as they approach eligibility limits. Experts caution that those without traditional pension plans at work should save at least 10 percent of their income,; increasing that to 15 percent in middle age. One often-cited rule of thumb is to plan to draw down your savings at a rate of 4 percent per year in retirement to avoid running out of money. (Inflation and taxes will erode your nest egg over 20 or more years of retirement.) It takes a mountain of money to kick off a decent sum; the following offers a primer for deciding where to stake your claim.

What are they?

Who Should use them?

Advantages

Disadvantages

Taxable accounts and investments

Stocks, bonds, mutual funds, money-market accounts, savings accounts and CDs: T; this is money that is not designated for retirement use. Interest income and capital gains are reported for tax purposes.

Anyone, from teens to retirees. This is a good place for goal savings, such as a house down payment, or as a parking place for several months of emergency funds.

Money in the bank is the bedrock of financial security for most people. Even kids benefit from the experience of setting something aside for the future, and watching it grow with interest. Savings are a cushion during a medical crisis or sudden layoff. This money is withdrawn at will without penalty.

Gains in these accounts are not sheltered from tax and may bump some savers into higher tax brackets. Requires effort to make deposits or arrange for withdrawals unless automated by direct deposit.

Traditional 401(k)

Pre-tax retirement accounts offered by some employers, often in lieu of a traditional pension. For most workers, savings are deposited before taxes are withdrawn, and are often matched by employers at a rate of 3 percent or more. Taxes are paid at withdrawal in retirement, when most people enjoy lower tax rates than in the working years. (403 (b) accounts offered to employees of non-profits are very similarin scope.)

Workers of all kinds, including some part-time workers whose employers increasingly offer plans. New federal pension regulations make it easier for employers to automatically enroll employeesinto plans. Thirty 30 percent of workers eligible to participate currently do not, forfeiting the tax break and any employer match. Non-participation in matched plans tantamount to forgoing a bonus. Total contributions are limited to $15,000 per taxpayer or $20,000 for those 50 and older, for tax year 2006; $15,500 per taxpayer or $20,500 for those 50 and older, for tax year 2007.

Puts saving for retirement in the employee’s’ hands: allows workers to dictate how their accounts are invested (stocks, bonds, etc.). A no-brainer tax break and, in capturing the employer match, an essential way to get every last dollar your boss is willing to pay out. Can use these savings for retirement as early as 55. Big news: federal protection from creditors. Contributions taken from paycheck and managed by professional administrators.

Penalty for early withdrawal. Some workers uncomfortable making their own investment choices from a dozen or more selections; contribution limits and income caps for high earners. Matching funds may be subject to vesting period. Borrowing capability not assured: varies by plan. Investments limited to employer plans.

IRA

This is an individual retirement account unrelated to a specific workplace. Pretax savings for those whose adjusted -gross income meetings eligibility requirements, with tax-free gain. Payouts in retirement are taxed at the retiree’s presumably lower rate.

IRAs are tax-advantaged for those workers under 70 who do not have retirement plans at work and/or meet income requirements. For eligibility guidelines see www.irs.gov/ publications/p17
WEB/MARK: direct link (click on “What’s New for 2006/7”). Note: For IRAs, partial tax breaks are offered to those whose income approaches eligibility limits.

Can pull money out for certain qualifying events, such as medical emergency; generates tax break for most earners. (bankrate.com). Can start withdrawals just before age 60.

Contribution limits of $4,000 for singles, $5,000 per person for married workers; with an extra $1,000 per year for those 50 and older, in both 2006 and 2007. For those with no other retirement plans, these sums are considered quite low for securing a retirement. Must stop making contributions by age 71, and must start taking money out then.

ROTH IRA

Another IRA savings tool, this time with money set aside after taxes have been paid. This increasingly popular IRA offers retirees a rare and welcome tax break — withdrawals in retirement are tax free for those over 59.

Those who like the idea of a tax-free retirement-income stream, and those who have maxed out other savings vehicles. Good for singles with annual income up to $110,000 for 2006, $114,000 for 2007; and married people filing jointly who earn up to a combined income of $160,000 for 2006, $166,000 for 2007.

Gains and withdrawals are untaxed. Especially good for younger workers in lower tax brackets who can leverage decades of tax-advantaged market gain. No penalty or tax for withdrawing original contributions after five years. No required payout schedule. A good investment to tap last, or leave for heirs.

No tax break on these savings during the working years.

ROTH 401(K)

An after-tax, employer-sponsored, employee-contribution savings tool offering tax-free growth.

Employees, especially those with a longer time frame who can leverage compounded tax-free appreciation to the fullest.

A good bet for those who want to enjoy tax-free money in retirement. Combines advantages of traditional 401(k) plans with the “no-tax at withdrawal” perk of other Roth accounts.

Relatively few employers offer this particular investment as of yet; no tax break at time of contribution.

ETF

Exchange-traded funds trade like a security, typically tracking one market index, such as health care or utilities. They offer a chance to invest in a focused group of investments managed with low overhead and some tax advantages.

Who should use it? Investors with time to familiarize themselves with a newer choice. At best, offers relatively low risk with the chance of higher returns due to low management fees, with a focus on a sector the investor may enjoy working with.

Lower fees and overhead due to the index-driven nature of the fund; more immediate liquidity than mutual funds. Tax efficient due to the way the funds are designed. Good for those who like to “pull the trigger” and trade more actively than mutual funds are typically traded.

Disadvantages: New set-up rules apply, and fewer choices to date than traditional index funds. Each trade generates commission cost, which may or may not be offset by generally low management fees. Not offered in many company-sponsored savings plans yet.

Find more details at these sources: http://finance.yahoo.com/; bankrate.com; troweprice.com; money.cnn.com; jeanchatsky.com; suzeorman.com; cnbc.com.

By Nan Connolly / Special to The Seattle Times