The number of choices for retirement today seem to be endless. Between the alphabet soup of choices, which one is best for you? Today, I will be discussing some of the features of each.
First, there is no rule of thumb. Everyone’s circumstances are different, and thus your particular needs will be unique. What could be best for you may be less than ideal for someone else.
Of the retirement options, there are individual plans and those offered by employers. Before you branch into doing your own retirement plan, you should determine what options your employer offers. The reason behind this step is that employer plans can include options or features you cannot obtain in private or individual plans. For most employer plans, the amount you can contribute during the year is higher. The costs could also be lower, although this is not always the case. The company plan may also offer a match.
If your employer is offering a match, then this is a plan you want to participate in regardless of the time you may believe you will work for the company. I have visited with many employees who thought they were going to be with their current company only a few months or perhaps a year. And yet, they are now reaching their third or fifth anniversary. Had they started participating in the company Savings Plan or 401-k at their first opportunity, by the time they really do leave, they may accumulate a tidy sum from the employer’s match. Because of the match, this is one retirement plan you do not want to miss.
If your employer does not offer a match, then the amount you are able to save during the year will be the determining factor of whether you participate through your employer or you open a personal retirement account. The employer’s investment options may also play a role in this decision. If your company plan only offers seven or fewer investment choices, you will need to determine if the performance record for these options warrants your participation. If their performance is less than desirable, even though you could defer more of your income, it may be worthwhile to open a personal retirement plan, such as an IRA, where your investment choices are far greater.
If you have your own business rather than working for someone else, then there are additional options for you. If you are the only worker for your firm and you do not expect to hire any employees, the Individual 401-k or the SEP are excellent options for your business. If you have employees, you may elect to install a traditional 401-k or a plan called SIMPLE. Both of these plans may require you to contribute on behalf of your employees in the event you want to make significant contributions for yourself.
At the personal level, any individual with earned income can contribute to a Traditional IRA or to a Roth IRA. For some company plans, you have the same options, Traditional 401-k or Roth 401-k. How you select between the two will be the same whether you are contributing to a personal plan or to a company plan.
To have the best opportunity to manage the income tax impact during your retirement, it is best to have several different pools of money from which you can take withdrawals. If all of your retirement assets are tax-deferred from personal accounts or employer options, then there is little you can do except take the withdrawal and report it as income. However, if you have different pools of funds and they are taxed differently, then you can add a level of control to your income tax liability. Thus, during your working years when your income tax liability is low, you should strongly consider adding to a Roth IRA or Roth 401-k. While you will not receive a current tax savings from your contribution to a Roth account, the funds will grow tax-deferred and all of the withdrawals taken will be income tax free.
Once you can no longer contribute to the Roth due to income levels, then directing all of your retirement deferrals to the Traditional accounts will be your next best option. You may also want to start contributing to a traditional plan as your tax rate increases. You can contribute to both a Traditional and Roth IRA. The combined contributions though cannot exceed the annual limit.
Contributing to your own retirement account whether through your employer or on your own will be a major step in creating your financial independence. If you have questions or need assistance in managing assets, please contact my office or that of an area professional.
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Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.