Your Nest Egg--Is It Working For You, Or Waiting?
Sadly, no such thing exists when it comes to planning your retirement.
I knew that retirement planning was important and enrolled myself in my 401K at one of my very first jobs. It had a cushy match. 4% of my salary directly deposited in lieu of pension, and then a 50% match up to 8%. I contributed 8% and got the full match each year.
I rolled this 401K over from employer to employer, and then after being laid off last fall, I wanted to get my retirement investments out of the company-managed plan (that particular plan had very high fees, and the employer had changed administration companies several times, each time there was a conversion fee to the accounts).
I took my 401K information to my financial planner and asked what to do now.
I was going to be self-employed and no longer have a match.
Low and behold, the fees on the 401K and all of the switches between administration firms were wolfing down my contributions as fast as I could sock them away.
I was nervous about a ROTH IRA because I have to “buy in” to all of the funds I wanted to invest in. Initially, this cost me about $680, but there’s never a fee to maintain my account unless I buy more shares or sell some shares and rebalance my investment.
Since I prefer to let things sit and rebalance 1x to 2x per year, this worked out to be a great investment and is saving me over the long term.
Another plus is that on my ROTH IRA, I’m paying taxes on the money going into the account (the small money) not the money coming out (contributions plus interest compounded over 30+ years). Alternatively, had I stayed with a 401k, I would have paid income tax in my retirement years…. What’s the fun of retiring if you have to pay gigantic income tax payments on YOUR money?
I’d like to retire early and we think that’s possible. My 401K wouldn’t have allowed me to withdraw until I was 59.5 and would have required a withdrawl by 70.5. I like the freedom that the Roth provides—I can choose when I’m ready to take my payments.
An important consideration on IRAs though is that the maximum contribution is just $5,000 a year, so it likely won’t be the entirety of your retirement savings. You’ll want to have some other investment going. A 401k allows you to contribute over $16,000 a year, which is especially good if you’re beginning your investment later in your career.
For those with excellent 401K and 401B programs available to them at work, you’ll have to get out your calculator or hire a financial planner to do the math for you, but like me, you may just find that your nest egg is better off in a Roth than in the corporate 401k.
{ 6 comments… read them below or add one }
I like the Roth IRA because my money grows tax deferred so I know exactly the amount of money I have and can take out when the time comes.
I do the traditional IRA and then I save the refund as well; if you get a 4% CD (penfed for example), your refund doubles (72/4 = 18 years) at least once.
There’s another option, and a great one for self-employeds like you and me: [drumroll please]
The Roth Solo 401(k)
You get the awesome Roth ability to pay tax now on the ’small money’, but get the much higher contribution limit of the 401(k). With the Solo designation you can also opt to ‘match yourself’ and make a tax deductable company contribution – but that part has to go into a non-Roth account.
They’re not offered by everyone, but E*Trade, TRowePrice and Vanguard all have pretty good ones available. I signed up for E*Trade’s (details here) because I get to invest in anything I want from individual stocks and bonds to mutual funds and ETFs. While they don’t have the absolute lowest per trade fees, I’m a big fan of their platform. And they do offer a pretty good selection of fee-free mutual funds and waive my annual fee for having a total balance of $50,000 across all my accounts (checking, 401k, Roth 401k, Roth IRA, and a taxable brokerage account). For those who don’t want to bother with anything but mutual funds, Vanguard’s is probably the way to go. The paperwork was a lot simpler than I expected, though I will have to file some sort of IRS form each year once my account gets over $200,000 or so.
Assuming that your tax rate remains constant, there’s really not that much of a difference in investing in one vehicle or the other. But what will happen to your tax rate? For people in their 20s (like me), that’s quite a gamble. On one hand, we hear that we will likely have lower tax rates in retirement than while working. This is not true for everyone, and there’s also a high possibility (becoming more likely every day) that the government will have to raise tax rates eventually to begin paying down the deficit (or just holding steady?). My husband and my solution is to contribute to both, so that by the time we retire we have significant tax-deferred and taxed assets. Right now, we contribute about $10k each year to each. (Combined income of about $70k, so we are saving a big chunk of our salaries.) We’re hoping to up the 401k contributions, someday to max them out, as we move up in our careers.
As for the expenses, getting these as low as possible is key. Where are you having to spend $650 to open Roth IRA accounts? May I suggest Vanguard? They have the lowest expense rates I’ve been able to find, and really easy (maybe too easy) online access.
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No kidding. Management fees from Wall Street money managers can kill you over the course of 30 or 40 years. Some mutual funds charge fees as high as 1.5% versus 0.07% for an index fund such as the Vanguard Total Market Index (VTI). That 1.43% compounded annually adds up to a lot of money, money you won’t have for retirement. So you’re wise to advise others to watch out for the fees!
Hey there Anon–I didn’t pay anything to open the account–The $600 was just the one time ocst of making the trades I made upon opening. Overall, I’ve got to say, I’m thrilled with the results on this portfolio (it’s at Edward Jones). There’s no maintenance fee–only one-time trade fees when I buy shares. I’ve realized a 38% gain this year.