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Retirement Savings Refresher

You know you should be saving for retirement, but how?  What’s the best way to set yourself up for success going forward?  We distill it for you below:

IRA vs. 401(k)

You should contribute to both types of accounts if possible in order to receive the maximum tax benefit. Just remember that 401(k) plans have a contribution limit of $18,000 (plus a $6,000 catch-up contribution for those age 50+) in 2017 and IRAs have a contribution limit of $5,500 (plus a $1,000 catch-up contribution for those age 50+), subject to certain income limits.  Thus, it may be possible for some individuals to contribute a total of $30,500 to both types of accounts in 2017.

Traditional or Roth IRA?

A traditional IRA usually works best for those individuals who are close to retirement and are in a higher tax bracket now than they expect to be in when they begin making withdrawals.  Otherwise, a Roth IRA is probably the superior choice.  Roth IRAs don’t impose required minimum distributions at age 70.5 like Traditional IRAs do and qualified distributions from them are free from taxes and penalties.  The same cannot be said for Traditional IRAs.

The Optimal Approach

Step #1 is to start saving for retirement as soon as possible.  Begin by contributing to your 401(k) in order to receive the maximum match from your employer.  Once you’ve received the maximum match, stop allocating funds to the 401(k) and start making contributions to an IRA.  If you are able to contribute the maximum allowable amount to the IRA and still have money left over, begin directing it back to the 401(k) again.  Your goal should be to contribute the maximum amount to both accounts.

Do you have questions about your particular situation?  Please don’t hesitate to get in touch.

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