What else should I be doing to prepare for retirement in addition to my current retirement accounts?
I recently changed jobs and I'm rolling over my 401(k) from my previous employer into a traditional IRA. My new employer offers a 401(k) and will match my contributions up to 6 percent. I want to contribute the maximum I'm allowed to my retirement. I'm considering three options: maxing out my new 401(k) contribution, or taking the 6 percent match and putting extra money each month into the rollover IRA to reduce my tax deduction because of my income, or setting up an additional Roth IRA. Which of these would be the best option? Would it be too much work to have a 401(k), traditional IRA, and Roth IRA, or would it be worth my time?
Having flexibility in retirement is an advantage and having all three wouldn't be too difficult. But without knowing your age or income levels I cannot give you sage advice. As a general rule though, the younger you are and the lower your tax bracket, the more advantageous a Roth is. This is because you have more time to compound & grow your assets to make up the out of pocket tax liablity of contributing to a Roth versus a before tax retirement account.
There are also income limits that may preclude you from contributing to a Roth. You definitely want to get the 6% match, and depending upon how good your 401k is - investment choices, whether you have a full brokerage options etc... - would also affect your decision. And you are doing the right thing by rolling your old 401k into an IRA for flexibility, lower fees, and virtually unlimited investment options. Each time you change jobs you should roll the 401k into this recepticle.
Your thinking is good though, and your decision is dependent upon your income, your current 401k set-up & options, age, income level, expected retirement date/age. So again, I need more information to give you solid advice other than the obvious of saving as much as you possibly can for retirement.
Sorry couldn't be more help, Dan Stewart CFA®
My normal priority list for allocating your cash:
1. 401k to the match.
2. HSA to the max.
3. Roth IRA to the max.
4. 401k to the max.
All four of those options have eligibility restrictions, so as you go down the list, ensure that you're eligible for that piece, and if you are, fill it up. If not, move down to the next one on the list, and so on.
You'll get the biggest deduction with the 401(k) since you can reduce your taxable income up to $18k/yr if you are under age 50, $24k/yr if you are over age 50. As where a Traditional IRA will only allow up to $5500 if you are under age 50, and $6500 if over. BUT, Traditional IRA's have income limits on their deductibility. For example, if you are married filing jointly, are covered by a plan at work, and have household income over $122k/yr, you are not allowed a tax deduction on Traditional IRA contributions. You can still contribute up to $5500 but there's no tax benefit. Roth IRA's, on the other hand, are also burdened by income limits to where you can't make a contribution at all. For example, if you are married filing jointly and have household income over $199k/yr, you cannot make any contributions to a Roth. If you can't reap the IRA benefits, you can always contribute to a Roth portion in your 401(k) if the plan offers one. There are no income limits on Roth IRA contributions and you could put all $18k per year in there if you wanted to. At the very very least, you should contribute up to the 6% match so you don't leave any free money on the table. If you're under the income limits, there's no harm in maxing out a Traditional and Roth IRA. It just depends on your current financial situation, tax filing status, and household income.
This is an excellent question, well really several questions, and I will do my best to address them all.
I would certainly, at a minimum, contribute 6% to your current employers retirement plan for the match. This is "free" money and should not be overlooked.
Although there could be benefits to contrbuting to both your 401(k) and a traditional IRA, keep in mind that you may not be eligible for a tax deductible contribution to an IRA based upon the fact that you are covered by a retirement plan and your income. You will want to be careful and make sure to know what you are eligible to do. Should you not be eligible for the deduction to an IRA than simply raise the amount you are contributing to your 401(k) and you will be in the same position as if you could contribute to an IRA on a tax deductible basis.
The Roth IRA is a good possibility, as long as you are within the income limits to make a contribution. It is wise to have both a Roth and traditional IRA/401(k) going itno retirment. This will allow you to withdraw monies that are both taxable and tax free, if needed, in retirement.
I think you need to first discern what you are eligble to do and then build a game plan that works for you in the best way to reach your retirement goals. You may want to consider hiring a fiduciary advisor to assist you in navigating this process.
I would not be swayed by the number of accounts you want to set up. Whether you have one account or three, you want to make sure that you are putting yourself on the best path possible for retirement. I would try and set up the accounts (outside of your 401(k)) at the same financial institution so you can receive consolidated statements and have one set of log in credentials, this will make things easier for you.
Good luck as you navigate this process!
Without knowing your exact financials and profile I cannot make specific recommendations for you. However, in general terms I can give you some food for thought. If you think income taxes will increase from current levels I would recommend not exceeding the employer match in your 401(k). If you think taxes will decrease from today I would max out the 401(k). Reason is that in a rising tax scenario you will get deductions in lower tax environment and distributions in retirement in a higher tax environment. In a rising tax scenario tax advantaged vehicles like Roth are the choice to go with. No required minimum distributions at 701/2, tax free income on earnings when taken, and tax free growth. The old paradigm of lower taxes in retirement is becoming a myth. I find my clients usually need as much in retirement as pre-retirement and even if retirement income is lower many times taxes are higher due to lack of deductions: mortgage interest, kids, deductible contributions to 401(k), and charitable contributions. I would keep enough in tax-deferred vehicles to stay below your standard deduction in retirement. Planning well before ry etirement for higher taxes may stretch your nest egg by 5 to 7 seven years in retirement.
Bill Garrett, CFP(r),
Garrett Wealth Management, LLC