Choosing the account to which you add your retirement savings is very important, as your choice could affect the amount of income tax you pay on withdrawals and the net amount you receive for withdrawals made overtime. The following are some factors to consider:
  • If you have the option to make salary deferral contributions to an employer-sponsored retirement plan, and your employer makes matching contributions, your salary deferral contributions should be no less than the amount that you need to get the maximum amount of matching contribution available, unless you cannot afford to contribute that much. Failing to contribute up to the amount needed to get all of the matching contribution available means that you would be leaving money on the table.
  • If you have the option of choosing between a Roth and a traditional retirement account, work with your financial planner to determine which of the two would be more suitable for you. There are many factors that are taken into consideration when making such a choice, including your current and projected future tax rates. In some cases, your financial advisor may determine that splitting your contributions between both types of accounts is the most suitable option for you.
  • Consider whether you are eligible for the savers credit. The savers credit provides eligible taxpayers with a non-refundable tax credit of up to $1,000 for contributions made to IRAs and salary deferral contributions for the year. The savers credit helps to offset the cost of funding your retirement account. As such, if you are eligible, it might be more beneficial to add amounts to your retirement account instead of a regular savings account or other tax-friendly savings vehicle. For an explanation of the savers credit, see Saver's Tax Credit: A Retirement Savings Incentive.
  • A defined contribution and defined-benefit plan can include provisions for official loans, which allow you to borrow the lesser of 50% of your vested account balance or $50,000. Loans can be used for personal reasons, including making a down payment toward the purchase of a primary home. Loans are required to be repaid within five years, except for those that are used towards a primary residence, which are allowed longer repayment periods if needed. These loans can come in handy when you are in need of funds and unable to get loans from traditional lending institutions, or if you simply prefer to borrow from yourself and make repayments to your accounts instead of paying interest to a lending institution. If the availability of a loan is a feature to which you want to have access, it may make sense to add amounts to your qualified plan account so that the balance grows to an amount that is sufficient to allow the loan that you need.
You may also want to consider whether the account has restrictions on when you can make withdrawals. This is important from two primary perspectives. If you save in an account that does not have withdrawal restrictions, you might be tempted to "borrow" from the account; if you are not able to repay the amount your nest egg would be adversely affected. If the account has restrictions on withdrawals, such as disallowing withdrawals until you reach age 59.5, you would not be tempted to make withdrawals before retirement.


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