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For Savers, Options Abound

February 16, 2003|Kathy Kristof

There is no shortage of savings plans, either available now or on the drawing board. Here's a look at the various options:

* Work-based retirement plans: Running the gamut from 401(k), 403(b) and 457 programs to Simple and SEP-IRAs, these plans provide upfront tax deductions and deferral of tax on investment returns. But when withdrawn at retirement, all the money is taxed at the account holder's ordinary income tax rates. Most work-based plans currently allow annual contributions of as much as $11,000. Many allow workers to borrow a portion of their savings before retirement in certain circumstances. But if money is withdrawn permanently before retirement, the distribution is subject to income taxes and a 10% penalty.

* Individual retirement accounts: IRAs, which allow $3,000 in annual contributions, come in two varieties: traditional IRAs, which provide upfront deductions and tax-deferred growth but are taxed when the money is withdrawn; and Roth IRAs, which don't provide upfront deductions, but money isn't taxed when withdrawn at retirement. Early withdrawals are subject to income tax and a 10% penalty, although with a Roth account, the tax and penalties are levied only on the investment returns.

* 529 plans: These state-sponsored college savings plans allow individuals to save $100,000 or more to finance college costs for a designated beneficiary. Money can be transferred to a new beneficiary but if funds were withdrawn for anything but education costs, the investment income built up in the account would be subject to tax and a 10% penalty.

* Coverdell accounts: Coverdell accounts allow earnings on contributions of as much as $2,000 per beneficiary per year to grow on a tax-deferred basis. Money withdrawn for education -- primary or secondary -- is tax free. But if Coverdell savings are used for a non-qualified purpose, the investment income is taxable and subject to penalties.

* Medical savings accounts: Available to employees of some small businesses with high-deductible insurance plans, these accounts can be tapped to pay unreimbursed medical expenses. MSA savings are taken out of pay before taxes are computed -- much like a 401(k) -- but if this money is used for anything other than medical bills, it's subject to tax and penalties.

* Lifetime savings accounts: President Bush's proposal would allow every American to save as much as $7,500 annually on a tax-free basis. Money could be withdrawn at any time for any purpose, without penalty.

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