A lot of people come up to me and ask, "Where is the best place to put money away for retirement?" The problem is that there is no 'best place' for it. It depends on your situation and what you are looking for. Factors that help determine your best place include: contribution limits, tax liability, withdrawal limitations, employer matches, transferability, control, and risk aversion. It is similar to picking out a jacket for the winter. There is no one jacket that is best for everyone. Think about all the things you decide on... How warm is it, how much does it cost, will it help me in the rain, can I exchange it or get a refund if I change my mind, and does it fit my style?
The first question you need to ask yourself is; how much do you want to contribute? Different plans have different contribution limits per government regulations. In 2018, in a Roth or regular IRA, the max you can put away is $6,500 (and that is if you are above 50!) and for a 401k that number is $24,500 (above 50). This is similar to how warm of a jacket do you need. Do you need to put away a lot of money to make up for the lost time (heavy jacket) or are you just looking to put a little away (light jacket)?
The next question is tax liabilities. What is it going to cost you? (How much does the jacket cost?) At some point, in all retirement plans you have to pay taxes on the money. The difference is, do you want to pay those taxes now or later. With the huge deficits and problems with Social Security, do you think taxes are going to go up or down in the future?
Do you want to pay taxes on the money now, when you can afford it, or later when you are on a limited budget? With IRA's & 401(k)'s you defer the taxes, while in Roth IRAs you pay taxes now.
The next question is about withdrawal limits. This is deciding if the jacket should be rainproof. Do you want to be able to use it on a rainy day? Do you want to have access to the money in case of emergencies? There can be harsh penalties if you withdraw from an IRA before the age of 59 1/2 (with few exceptions). You can't normally withdraw from a 401(k), you can only take a loan. In a Roth you can withdraw the money you put in (not the growth) without penalties, but if you do there is no way to pay it back.
The next question deals with 401(k)'s. Does your employer match your contributions, and if they do, how much do they match? Think of this as a bonus offer. It’s free money, and it definitely needs to be considered.
In next month's issue, we will talk about the remaining things to consider when deciding where to put your money away for retirement.
