Investing for Retirement

Posted On: 2007-01-09
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Hello and welcome to Money Girl's quick and dirty tips for a richer life.

Thanks so much to those of you who have written in with questions. I'm looking forward to answering as many of them as I can in future episodes. Today's topic is investing for retirement, a topic some of you have asked about. One big financial goal shared by almost everyone is accumulating enough money to retire comfortably. But figuring out a game plan can seem overwhelming. There are 401Ks, traditional IRAs, Roth IRAs as well as other types of retirement savings plans. The biggest risk is inaction. With all the investment choices, it's all too easy to succumb to analysis paralysis and do nothing. Now retirement investing is a really big topic. In this episode I'm going to talk about just one aspect of it, how to be a little strategic when investing in an employer sponsored retirement plan. If your employer offers a retirement plan, such as a 401K, it's usually a good place to invest, especially if your employer matches your contributions and you have a broad array of investment choices within the 401K. An employer match is free money, so if you do nothing else, invest enough in your 401K to take full advantage of the employer match.

And now here's a little strategy. If you're younger, and think you'll be in the same, or a higher tax bracket than you are now, you'll typically come out ahead if you contribute to your 401K up to the point of getting the full match. And then, contribute to a Roth IRA if you're eligible. With a Roth IRA you contribute after-tax money and your earnings get to grow tax free, which is pretty amazing. With a 401K, on the other hand, you contribute before-tax money and your earnings grow tax deferred. Which means you'll have to pay taxes on them when you tap the money during retirement. Not everyone is eligible for a Roth IRA. For 2007, if you're single, eligibility phases out for incomes between $99,000 and $114,000. If you're married and file jointly, eligibility phases out between $156,000 and $166,000. At the very least, contribute enough to your 401K to get the full employer match. Then contribute to a Roth IRA if it makes sense for you and you're eligible. For 2006 and 2007, the contribution limit for a Roth is $4,000. Or $5,000 if you're aged 50 and over. And, if you can afford to invest more to retirement after contributing to a Roth, consider contributing to your 401K. The limit for 401K contributions for 2007 is $15,500. And if you're over 50, you can contribute an additional $5,000. Now, if switching from your 401K to a Roth and then back to your 401K sounds way too complicated, remember that the most important thing is to contribute enough to your 401K to get that full employer match. I hope I have driven that one home. Beyond that, you can simply keep on contributing to your 401K as your circumstances allow.

Lastly, I wanted to mention that there's still time to contribute...