Ai notenough

Why Your 401(k) May Not Be Enough for Retirement

Your 401(k) is the first place Dave recommends you invest for retirement once you reach Baby Step 4. And there are plenty of reasons why:

—If your employer matches your contributions—and many do—you get an instant return on your investment.

—Tax-deferred growth means your money grows faster.

—Pre-tax contributions lower your taxable income and increase the amount you can invest.

Your 401(k)’s Shortcomings

As awesome as that is, 401(k)s do have some shortcomings. First is a limited choice of mutual funds, which can keep you from investing in the best funds on the market. Second is the 401(k)’s tax-deferral. While it works to your advantage while you’re saving, it means you will owe taxes on the money you withdraw from your 401(k) in retirement.

Ny2013 bv budget1

A Roth IRA is the perfect choice to accompany to your 401(k) because its features overcome these shortcomings:

1. Flexibility – You can choose from thousands of mutual funds to invest in through your Roth IRA. That means you can choose the best funds and diversify with different fund families.

2. Tax-free growth and withdrawals – When you retire, you’ll be able to use the money in your Roth IRA tax free. A tax-free option will come in handy since most people expect tax rates to be higher in the future.

Getting Them to Work Together

To adequately fund your retirement, you need to invest 15% of your income. For the average income of $50,000, that’s $7,500 per year. If your employer matches contributions up to 4% of you pay, for example, then you’d contribute $2,000 a year to your 401(k). The remaining $5,500 will go into your Roth IRA.

Some things to remember:

—Roth IRA contribution limits are currently $5,500. If you reach your Roth IRA limit but still haven’t invested your full 15%, invest the remaining amount in your 401(k).

—If you don’t have a 401(k) or other retirement savings plan through your employer, or if your employer doesn’t match your contributions, start with the Roth IRA. If you max it out and still have money to invest, invest through your 401(k), if you have one, or open a taxable brokerage account.

Get the Most Out of Your 401(k) and Roth IRA

To get started, ask your employer how to set up your 401(k). For your Roth IRA, it’s best to work with an investing professional who can also help you choose the right funds—and even coordinate choices within both accounts. You can find an experienced investing advisor with the heart of a teacher through Dave’s Endorsed Local Provider (ELP) network.

Your ELP will show you how to invest the way Dave recommends, and help you keep your retirement savings plan on track for the long term. Find your ELP today!

More from the Blog

  • 4 Competitive Pitfalls to Avoid This Christmas

    When you compare your holiday celebration with someone else’s, you rob yourself of the simple joys of the season. It’s time to stop comparing and start celebrating again.
  • How to Get Through the Holidays After a Big Life Transition

    If you find yourself struggling to face the demands of the season, give yourself some grace. You’ve been through a lot. Here are four ways to ease into the holiday hustle after a big life transition.
  • 7 Holiday Traditions to Rethink This Christmas

    Each year we look forward to certain family traditions, like baking Granny’s gingerbread cookies. But not every holiday tradition is quite so fun. Here are 7 holiday traditions you can rethink this season.
  • Christmas Clutter: 6 Expenses You’re Probably Overspending On

    Have you spent all of your Christmas budget on gifts? The last thing you can afford is to spend even more money on stuff that isn’t necessary. Here are a few areas to cut from your holiday expenses.
  • 5 Money Lessons Learned From the Gridiron

    There is more to football than championships, tailgating and fantasy drafts. Here are five life lessons you can learn from the popular sport.
  • Draw a Line in the Snow: How to Set and Stick to Gift-Giving Boundaries

    Between friends, co-workers and extended family, where do you draw the gift-giving line? Before you hit the mall this year, set some gift-buying boundaries.