FROM A TAX perspective, you can think of a tax-deferred variable annuity as similar to a nondeductible IRA. You won’t get an initial tax deduction, but you do get tax-deferred growth.
Problem is, unlike a nondeductible IRA, you can’t convert a variable annuity to a Roth IRA. On top of that, a variable annuity gives you much less investment choice and you’ll face much higher expenses. Within an annuity, you get to choose from among a series of subaccounts that are similar to mutual funds.

IF YOU WITHDRAW money from a retirement account before age 59½, you typically have to pay both income taxes and a 10% tax penalty. But there are some situations where the penalty wouldn’t apply:

Distributions made after your death.
Distributions made after you become permanently disabled.
Withdrawals from an IRA to pay higher-education expenses. These withdrawals can hurt financial aid eligibility, a topic discussed in the college chapter.
Withdrawals of up to $10,000 from an IRA to buy a home.

IF YOU MAKE REGULAR annual contributions to a Roth IRA, you can withdraw those contributions at any time with no taxes or penalties owed. It’s a different story, however, with the account’s investment gains.
Those gains will be subject to both income taxes and tax penalties if you withdraw them within the first five years and if you are under age 59½ (or, to put it another way, you need to wait five years and until after age 59½ for the account’s growth to be totally tax-free).

FOR YEARS, MY INCOME was too high to deduct a traditional IRA contribution or fund a Roth IRA, so I was left making nondeductible contributions to a traditional IRA. Meanwhile, before 2010, I couldn’t convert my traditional IRA to a Roth, because my income was above the $100,000 cutoff. But in 2010, the law changed, so that anybody could convert.
I jumped at the opportunity, converting my $111,249 traditional IRA to a Roth. The sweetener: I only had to pay taxes on $62,674 of additional income.

WHEN YOU CONVERT a traditional IRA to a Roth IRA, you don’t have to pay taxes on your nondeductible contributions. Let’s say that, over the years, you have made $20,000 in nondeductible contributions to an IRA that are now worth $30,000. When you convert, you don’t have to pay taxes on the $20,000 in nondeductible contributions. Thus, the conversion would potentially add just $10,000 to your taxable income, while giving you a $30,000 Roth that will grow tax-free thereafter.

WHY CONVERT YOUR traditional IRA to a Roth IRA? The rationale is similar to the reasons you might funnel your regular annual contributions into a Roth rather than a traditional IRA. There are, however, four additional considerations.
First, you might convert to a Roth if you have a year with low taxable income, so you pay tax on the conversion at a relatively modest rate. Remember, when you convert, you have to pay income taxes on the taxable sum converted.

OKAY, SO YOU READ the previous section and saw how a tax-deductible retirement account can give you tax-free growth, just like a Roth, because the initial tax deduction effectively pays for the final tax bill. In fact, if your tax bracket is lower in retirement, a tax-deductible retirement account can let you come out ahead at the taxman’s expense. Meanwhile, if your tax bracket in retirement is higher, you’ll be happy you funded a Roth.

ASSUMING YOU FOLLOW the rules, a Roth IRA or Roth 401(k) will give you tax-free growth—and it doesn’t get much better than that. But what about traditional 401(k) plans and IRAs, where you can get an initial tax deduction, but everything withdrawn in retirement is taxable as ordinary income?
Occasionally, you’ll hear so-called experts—who often have some other investment they’re peddling—criticize tax-deductible retirement accounts, arguing that people are setting themselves up for huge tax bills in retirement.

YOU MAY QUALIFY TO fund both a tax-deductible and Roth IRA. Alternatively, perhaps your employer offers the chance to fund either a tax-deductible or Roth 401(k). Which should you go for?
A key factor is whether you think your tax bracket in retirement will be higher or lower than it is today. If you expect your tax rate in retirement to be the same or higher, you should favor the Roth, giving up today’s tax deduction in return for tax-free growth.

TO CLAIM A TAX deduction for your traditional IRA contribution, much hinges on whether you’re covered by a retirement plan at work. That doesn’t come into play with a Roth IRA. Instead, all that matters is your income.
If you are single or head of household and you have enough earned income, you can fully fund a Roth IRA in 2024 if your modified adjusted gross income is less than $146,000. The amount you can contribute is phased out if your income is between $146,000 and $161,000.

SUPPOSE YOU AREN’T covered by an employer’s retirement plan and—if married—your spouse isn’t, either. In that scenario, you can take a tax deduction for your contribution to a traditional IRA, no matter how high your income.
But if you have a retirement plan at work, income thresholds come into play. If your tax-filing status is single or head of household, your ability to take a tax deduction for your IRA contribution phases out if your 2024 modified adjusted gross income is between $77,000 and $87,000.

THE IRA WAS FIRST introduced in 1974 as a way for those without employer pension plans to save for retirement. Today, individual retirement accounts come in two flavors: traditional and Roth. With a traditional IRA, you may get an initial tax deduction, but withdrawals are taxed as ordinary income. With a Roth, there’s no upfront tax deduction, but all withdrawals in retirement can be tax-free.
You can contribute up to $7,000 in 2024 and 2025 to all IRAs combined,

GOT COMPANY STOCK in your 401(k) plan? If you leave your employer, consider taking advantage of the net unrealized appreciation, or NUA, tax strategy. The idea is to transfer everything in your 401(k) to a rollover IRA—except your employer’s stock. These shares, instead, get deposited into a regular taxable brokerage account.
This triggers an immediate income tax bill on the stock’s cost basis, which is the amount you paid for the stock or the amount it was worth when you received it as a matching employer contribution.

IF YOU MOVE MONEY from one retirement account to another, try to arrange a trustee-to-trustee transfer, also known as a direct rollover. That involves asking your brokerage firm, mutual fund company, bank or former employer’s 401(k) administrator to send a check that’s made out to your new retirement plan custodian. For instance, the check might be payable to “First Fiduciary Trust Company FBO [for benefit of] Jane Smith.” The check may be sent directly to your new retirement account provider or it could be mailed to you,

IF YOU’RE CHANGING jobs, take two steps to protect your retirement. First, if you have an outstanding loan from your 401(k) or 403(b) plan, get it paid off. If you don’t and you leave your job, the loan will be considered a distribution, triggering income taxes and probably tax penalties. There’s more on 401(k) loans in the chapter on borrowing. Second, if there’s a vesting schedule for your employer’s contribution to the retirement plan,