Employees who have 401k plans might wonder why they should worry about an Individual Retirement Account. It's simple: You can never save too much for retirement. An Individual Retirement Account is a saving plan that offers tax-advantaged growth. Some workers, however, delay participation because of confusion over the many IRA plans, such as a rollover account when you change jobs.
You can maximize your Individual Retirement Account savings, at and outside of work, with a simple three-part plan:
1. Examine the variety of IRA plans to find those that fit your overall retirement strategy.
2. Discuss Roth IRAs and 401k plans with your financial planner and workplace benefits representative before making any move.
3. Don't delay investing in an Individual Retirement Account. The earlier you start saving, the more money you'll have to enjoy retirement.
Choose IRA plans based on your overall finances
Picking the appropriate IRA plan depends on where you are now financially. Examine your current savings vehicles as part of a comprehensive retirement plan. Then take the appropriate next steps to maximize your retirement investments.
Roth IRAs vs. traditional IRA plans
Your choice of Roth IRAs or traditional IRA plans depends on your personal circumstances, but Roth IRAs are increasingly popular because their eventual distributions are tax free. Traditional IRA plans still appeal to some, though, because they offer an immediate tax deduction.
IRS Publication 590
and take a look at page 5, which includes a chart that shows the differences between Roth IRAs and traditional IRA plans. State Farm offers a table that compares both types of IRA accounts. Many financial services companies also offer comparisons of traditional IRA plans and Roth IRAs. Scottrade, Fidelity, T. Rowe Price and Charles Schwab & Co. all offer various IRA plans and rollover options.
Keep 401k plans working for you
Employers help you reach your retirement goals via company-sponsored 401k plans. But when you leave a job, don't leave your retirement money. Take control of your company savings via a 401k rollover account. If your new job offers such plans, transfer your account to the new company. If that's not an option, move money from 401k plans into an IRA rollover account.
After age 50, beef up contributions to IRA accounts
Age has its benefits when it comes to retirement savings. If you're age 50 or older, you can "catch up" by contributing an additional $1,000 to IRA accounts and 401k plans. Catch-up contributions are possible for all types of retirement savings vehicles, not just 401k plans, but each has special rules that must be followed.
- It's usually not wise to leave 401k plans with a former employer. Many plan administrators charge fees to manage your money, regardless of whether you're still with the company or a former employee.
- Carefully weigh whether the immediate tax break of traditional IRA plans is more important than the advantages of tax-free Roth IRAs.
- You may put your 401k rollover amount into existing traditional IRA accounts. However, keeping your 401k rollover money separate simplifies tax recordkeeping.
- Ensure any retirement account transfers are direct between old and new employers or via an IRA rollover. If you take direct possession of the money, you'll likely face early distributions penalties as well as owe any potential federal tax on the money.