SavvyPoll Number Two

Retirement AccountsThe vast majority of Americans that contribute to retirement plans do so through either a defined contribution plan (the 401(k) being the most widespread and most well-known), an Individual Retirement Plan (IRA) – either Traditional (tax-deferred) or Roth (tax-exempt) – or a combination of the two.

Defined contribution plans such as the 401(k) offer at least one distinct benefit and one potential benefit. The benefit? The money you contribute to a defined contribution plan is done so on a pre-tax basis, meaning your annual tax liability is reduced. The potential benefit? If your employer provides matching contributions, free money is put to work for you.

As with a 401(k), a Traditional IRA offers a tax-deferred benefit. Compare that to a Roth IRA which is tax-exempt, meaning you will not realize a tax benefit in the year contributions are made. Instead, the tax benefit is realized when withdrawals are made.

My preference? If an employer offers a 401(k) plan (contribution limit = $17,500 for those 49 and younger; 50 and older can add an additional $5,500 in catch up contributions), employees should first strive to contribute enough to capture any matching contributions in that tax-deferred type of plan.

Second, SavvyInvestors should then open a Roth IRA account (contribution limit = $5,500 for those 49 and younger; 50 and older can add an additional $1,000 in catch up contributions), a tax-exempt type of plan. Having retirement money in different types of accounts provides more flexibility with respect to taxes when the time comes to develop – and execute – a withdrawal plan.

Of course, the goal for SavvyInvestors would be to get to the point of maximizing contributions to both.

This week’s SavvyPoll asks, “Are you currently contributing to a retirement plan(s)?”

A. No

B. Yes – a 401(k) plan

C. Yes – an IRA (Traditional or Roth)

D. Yes – both a 401(k) and an IRA

 The results…

Poll #2

 

 

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

9 Comments

  1. A Google+ reader notes…

    “Same here in Canada registered retirement savings plan (rrsp) or employer pension with a dash of stocks thrown in for good measure, playing stocks is fun but not with the majority of the money only a small to medium percentage.”

  2. D.
    Could not agree more with Brian, especially concerning the middle age group. The cannot afford it (or just won’t) people seem to be a frightening trend. Will the savvy few have to bear the burden of the unconcerned many? Something to ponder.

    • Your selection is noted, Brad. No doubt that those that have saved/invested will be burdened by the lack of planning of the unconcerned. The real questions are in what manner (e.g. increased taxes, reduced Social Security benefits, etc.) and to what extent?

      As I have said before in various posts on this blog, and I will say again, the SavvyIndividual understands that there will be negative impacts – beyond their control – to their retirement planning/portfolio. Therefore, it pays to save/invest more than anticipated and develop multiple streams of retirement income.

  3. D.

    I may have mentioned previously on another post that I was surprised at the number of [both young and older] co-workers who were not contributing to our employee sponsored 401(k) and Pension plans.

    • Your answer is noted. You have mentioned that previously and that has been my experience as well. Unfortunately, even those that are aware of their ability to contribute to such plans often fail to do so. I often hear excuses like, “I can’t afford to invest at this time.” Of course, my reply is always the same. “You can’t afford NOT to invest right now!”

      That does not appear to be the case with SavvyReaders thus far, as all of the early responses are for contributing to both a 401(k) and and IRA. Nice!

  4. D (finally) 🙂

    • Excellent! Thanks for stopping by. Check back Wednesday for the results.

  5. Count me in as a D.

    • Done. Check back on Wednesday for the results.

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