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Retirement Plan Vertigo

With our baby boomer-in-chief turning 60 earlier this summer, and the boomer generation marking that same milestone this year, we're providing a number of articles that might be useful to this noteworthy generation. This article was published on February 1, 2006.

Ever walk into a supermarket and find yourself overwhelmed by the dizzying array of choices? From soy milk to trash bags, these days you'll find umpteen options for just about any product you'd care to buy.

When it comes to retirement plans, the choices are plentiful, too. IRAs come in Roth and traditional flavors, and this year, the federal government rolled out Roth 401(k)s. Meanwhile, solo 401(k)s have been significantly juiced up, and self-employed pension plans (a.k.a. SEPs) have a long and venerable history.

Suffering from retirement plan vertigo yet? Not to worry. We're here to help. Below you'll find three items for your retirement to-do list that may help you hit the back nine with a fat nest egg in tow.

In the meantime, let's skip the mixed metaphors and cut to the chase, shall we?

1. Forget tradition?
When it comes to keeping the taxman at bay, Roth IRAs generally have it all over their traditional cousins. True, you won't receive a tax deduction during the year in which you make your contribution. Your savings will grow tax-free, though, and unlike with traditional IRAs, you won't pay any taxes when you hit your dotage and begin to draw down your account.

As attractive as the Roth IRA is, however, you should spend some quality time thinking about your post-retirement tax situation before choosing it. If you anticipate paying Uncle Sam at significantly lower rates in the future, you may want to stick with tradition. Beyond that, highly paid individuals should bear in mind that once your adjusted gross income rises to $95,000 (for single filers) or $150,000 (joint filers), the amount you can contribute to a Roth begins to diminish.

2. Encourage your employer to adopt a Roth 401(k).
Roth 401(k)s do for company retirement plans what Roth IRAs do for individual retirement accounts -- i.e., they allow you to contribute after-tax dollars in exchange for not having to pay the IRS when you begin taking withdrawals after age 59 1/2. As with IRAs, you'll need to consider your likely tax bracket as a senior. Still, if you've got a sneaking suspicion that tax rates will probably rise in the future -- and certainly if you expect to be in a higher bracket come retirement time -- you should talk to your boss about Roth.

3. Fly solo.
If you're a self-employed person -- or if you work with just your spouse -- give solo 401(k)s a close look. Contribution limits are higher than with SEPs, and unlike all too many company-sponsored 401(k)s, you're not shackled to a list of mediocre mutual funds. Indeed, you are the plan administrator, and so investors of, say, the growth persuasion, are free to plunk down contributions on race cars like Yahoo!(Nasdaq: YHOO), eBay(Nasdaq: EBAY), or Amazon.com(Nasdaq: AMZN), three companies whose forward price-to-earnings ratios dwarf those of the broader market.

Penny-pinchers seeking a value investing strategy, meanwhile, might opt for more value-oriented fare like Boston Scientific (NYSE:BSX) or Dell(Nasdaq: DELL), whose current prices are 30% or more below their respective 52-week highs.

Whether you're a baby boomer approaching retirement age or you've got quite a few years to go, our latest special report will shed some light on innovative health care and biotech companies that are paving the way to golden returns for your golden years. The Motley Fool's top analysts bring you premium stock picks in The Big Boom: Explosive Opportunities in Biotech and Health Stocks.

Amazon.com, eBay, and Yahoo! areMotley Fool Stock Advisorrecommendations. Dell is aMotley Fool Inside Valuepick.

Katrina Chan updated this article, which was originally written by Shannon Zimmerman, lead analyst for the Fool'sChampion Fundsnewsletter service. Katrina doesn't own shares of any of the companies mentioned. The Fool has a goldendisclosure policy.


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