Just recently, while having lunch with one of my coworkers, the topic of retirement accounts came up. Our employer offers an exciting 50% 401K match; I noted this and stated my excitement over this feature of our employment contract.
“If your financial resources allow it, making the maximum 401K contribution should be top of mind.
Co-worker: “I do not agree. In general, it would be prudent to maximize a Roth IRA before contributing to a 401K.”
“Whoaaaa!”
Through further dialogue, I came to understand that my co-worker believed Roth accounts had some form of tax-savings properties which made them superior to traditional retirement accounts.
My co-worker wasn’t entirely wrong when he said this; Roths are often overrated – however if he followed through with what he preached he’d miss out on thousands in free money every year! Plus there’s the promise of instant 50% returns!
Over the years, I’ve discovered that misunderstands retirement plans are common. Why?
However, due to many employers not providing 401Ks to employees, many people lack experience with retirement accounts in general and 401Ks specifically. When discussing retirement accounts such as Roth IRAs or SEP / HSA accounts without knowing more about them first hand can be daunting and intimidating if unfamiliar terms like Roth, Traditionalal, SEP & HSA come up.
Researching all available options takes time and energy.
Bear in mind that personal savings rates (general average is 5%; millennial average is -2%) are very poor and people do not have savings to contribute to retirement accounts, meaning there is no reason to learn what they may be contributing towards.
Given this lack of understanding, it comes as no surprise that many are unclear as to how they should allocate their retirement account plan contributions when they do save some savings for retirement accounts.
At this page, my aim is to rank order, in priority order, the best retirement plan accounts (with #1 being top priority). Note that I will not rank order self-employment income retirement account options here as I have already conducted an analysis at that link; if you start an account for self-employment income such as Solo 401Ks, SEP IRAs or SIMPLE IRAs then treat them on equal footing with Traditional IRAs here.
As mentioned above, my advice may differ depending on whether your employer matches or doesn’t match your contributions.
As a reminder, Traditional retirement accounts are tax deductible when contributed and taxed upon withdrawal; while Roth accounts are post-tax (ie taxed when contributed and not deductible) and will not incur a tax bill upon withdrawal. Also keep in mind that similar rules should apply to your 403B/401K equivalent account as well.
+ There are no comments
Add yours