There are quite a few choices when you are looking for a retirement account. First, are some of the retirement accounts that you can only get through your job.
- Roth 401(k)
- Simple IRA
- Sep IRA
- Pension Plans
Then, you have the retirement accounts that you can open on your own – with or without a job.
Unless you own the company you work for, your only choice for a company sponsored retirement plan is the one your company offers you. Often your company will contribute to your account on your behalf. Sometimes they will do that whether or not you contribute, but most often they will contribute as a match to your contribution. If they are contributing as a match, and you are not taking advantage of that, you are essentially giving up free money, a raise, or an impressive return on your investment. Call it what you will, but it is NOT a smart thing to do. Figure out a way to contribute at least enough to take full advantage of the company match!
But what if you want to open a retirement account outside of your employer? It’s not hard to open up an IRA or Roth IRA. You can open up one just about anywhere. Banks, mutual fund companies and brokerage firms, both online and offline, all offer IRA accounts.
Should you choose a traditional account or the newer Roth account? For most people, I would suggest that you choose the Roth option. Yes, you give up the immediate tax break, but you have the potential to save much more in taxes down the road. If you are young and just getting started on your career, you are probably in a lower tax bracket than you will be when you retire. Putting away even a small amount can multiply over time and provide you with a substantial tax free income in your retirement.
There’s another reason why I prefer Roth accounts. Plenty of people don’t immediately need the money they have accumulated in their retirement accounts. But when you turn 70½, you are required to start withdrawing money out of your traditional account at a predetermined rate. For some people this puts them in a higher tax bracket since they are required to pay taxes on whatever is withdrawn from a traditional account in the year it’s withdrawn. With a Roth IRA, you aren’t required to take withdrawals regardless of your age. So you can take money out when it suits you, not when it suits the IRS! In addition, there isn’t any tax due when you make a withdrawal.
Most of the remaining rules are similar to both types of accounts. And of course all the rules and regulations are subject to the whims of Congress. But if the laws remain as they are, my own personal choice is the Roth IRA.
Everyone’s financial situation is unique. It may be beneficial to seek out a financial advisor to help you make the right decision. Don’t forget things may change along the way. It’s also pretty common to have more than one type of retirement plan that you are investing in at any given moment. So don’t be afraid to seek out professional help. You are investing in your future.