Retirement Account Overload

There are thousands of companies listed on the major stock exchanges and nearly as many mutual funds organizing them in creatively titled buckets. Once a gal decides which ones she wants, she's still got more shopping to do. Roth or regular? A 401(k) or taxable brokerage account?

In matters of hair-care products and retirement investing, there's a general order that's best followed during the application process. For the former, read the bottles. For the latter, here are some guidelines:

1. Employer plan with a match: This year Uncle Sam allows you to contribute $14,000 to a defined-contribution plan (e.g. a 401(k) or 403(b)), though employers have their own limits, too, so check with the boss man first. There's an added bonus for those age 50 and over: You can make a catch-up contribution of $4,000.

Why is this your first parking space for cash? The key word is "match." If your company matches any percentage of your contributions, you instantly double your money. So at the very least, contribute enough money to your plan to get the free dough. Other benefits of a defined-contribution plan are:

  • Tax deduction: The money you contribute to the employer plan is not included in your income for tax purposes.
  • Tax-deferral: You don't pay taxes until you retire. That leaves more of your money to grow through the years.
  • Automation: The money is transferred directly from your paycheck to your account. No checks to write, no monthly reminders, no skipping out on contributions because of a great shoe sale.

2. Roth IRA (if you qualify): The Roth IRA rules. Rule Your Retirement expert Robert Brokamp has nothing but gushing praise for it.) This year you can park $4,000 in a Roth IRA. What do you get?

  • Tax-free growth: Your earnings are not taxed when you spend this money because you paid your taxes on it upfront.
  • Control: A work retirement plan gives you limited investment choices. With an IRA (Roth or traditional), you call all the shots. Simply open a discount brokerage account and take your pick from the vast universe of investments.
  • No mandatory distributions: Traditional IRAs and employer-sponsored plans force you to begin taking money out of them at age 70 1/2. With the Roth you can leave your dough to grow for as long as you like.

3. Employer plan without a match: We just snubbed bosses who offer no monetary incentive to invest in their defined-benefit program. So why are we revisiting your employer's plan? After you've exhausted your IRA options, the automated investing option is still attractive. Plus, by participating you reduce your taxable income. However, if the investment options in the plan are unattractive or you cannot qualify for a Roth IRA, consider instead our last option.

4. Traditional IRA: The contribution limits are the same as for the Roth, and those limits apply to total annual IRA contributions (in other words, you can't contribute $4,000 to a Roth and $4,000 to a traditional IRA). A traditional IRA grows tax-deferred and is taxed as ordinary income upon withdrawal. Plus, contributions are tax-deductible if your employer doesn't offer a retirement plan, or you are single and your adjusted gross income is below a certain level. Those levels change every year, so check with the IRS.

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