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I am currently 38 and do not have any retirement accounts yet. Which retirement plan will be best for me now?

My employer has the 401k but, with no matching contribution this year. However, they have plans to match 100% of the first 3% of my contribution starting from 2015. I will not loose that free money from next year but, I want to open a retirement account now during the middle of the year as I am eligible because of a life changing event. Please let me know which one would be better for me like 401k without employer matching, IRA, Roth IRA or any other. And I want to roll over to the 401k with employer maching next year.

Sep 09, 2014 by Mukunda in  |  Flag
8 Answers  |  6 Followers
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1 vote

Your tax picture influences this decision, so you will want to consider the following.

  1. If you are eligible to participate in the 401(k) plan and chose not to, then you may not be able to deduct contributions to a Traditional IRA. If this is your situation then the 401(k) or Roth IRA make more sense than the Traditional IRA.

  2. If your income is too high, you may not be eligible to contribute to a Roth IRA. If this is the case and number 1 above applies, then the 401(k) may be your best option.

  3. If you suspect that your tax rate in retirement will be higher than it is now, then a Roth account makes the most sense. If you think your tax rate will be lower in retirement then a deductible account (401(k) or Traditional IRA) may be the best choice.

  4. You may have access to different asset classes or better funds through an IRA, so you might want to consider that as well.

2 Comments   |  Flag   |  Sep 10, 2014 from Alexandria, VA
Mukunda

Thanks a lot Curt. If I am understanding it correctly in your point#1, I am not eligible to make a full pre-tax contribution to my IRA in this year just because I am eligible to participate in my employer's 401(k) though I am not doing that currently. Please let me know if this is correct. I don't have a check mark in box 13 on my previous year W2.

Flag |  Sep 10, 2014
Curt Sheldon, CFP®, EA, AIF®

If there is no check-mark then you are not covered. If there is a check-mark then you might not be able to contribute to a deductible Traditional IRA...depending on your Adjusted Gross Income.

Flag |  Sep 11, 2014 near Alexandria, VA

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Layton Jacob Cox Level 11

It seems that you will easily be able to determine what plan to get into, but that won't get you to retirement. Tax breaks and benefits are nice and all, but you are the only person that can control your retirement destiny. 38 isn't exactly young, but luckily it's not old either.

You need to take a long and hard look at your financial picture now, and figure out a way to save around 15% of your pay minimum over the next 30 years.

I can't stress this enough, but individuals that are younger than 40 are the individuals that are in desperate need of financial advice. You should partner with a financial advisor who can help work through these issues with you. Every penny you pay to him will become dollars in your pocket later down the road.

This is my best attempt to give you a wake up call. It's not too late, but you need to work harder now than you thought you would have to.

Comment   |  Flag   |  Sep 10, 2014 from Tucson, AZ

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The answer to which one is the best is too difficult to answer with the limited information.
Sometimes a ROTH make sense, other times its a traditional IRA that is best (you should look into your company plan and see if they have a ROTH option too). For me, it's just about picking one and saving at this point, and save as much as you can.

Comment   |  Flag   |  Sep 14, 2014 from Exton, PA

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Mukunda,

If your employer plans to start offering matching 401(k) contributions next year, I’d definitely advise you to take advantage of that. You’re getting a bit of a late start on saving for retirement, so you’ll want to take advantage of any extra money you can get your hands on. You can set up your 401(k) account now so that you can start saving as soon as possible and won’t miss out on any matching contributions when they do start. As far as setting up a traditional or Roth IRA, I’d advise you to talk to a financial advisor about which options are best for you. The IRS has rules about when and how much you can contribute to these accounts, and they can be a bit difficult for individuals to parse. The other big reason to talk to a financial advisor is that he or she will be able to help you determine how much you need to be saving now to get you on track for retirement, as well as how to invest those savings. Good luck!

Comment   |  Flag   |  Nov 05, 2014 from Township of Anderson, OH

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You can actually contribute to a Roth account regardless of your income level, you'll just have to follow an additional step or two. If you are over the income limit you can contribute to a non-deductible IRA and then immediately convert the account over to a Roth.

Most likely your income will not be higher in retirement unless you have a truly unique situation. Therefore I wouldn't think of pre-tax versus Roth as an exclusive decision. There are benefits to having both in retirement as you have flexibility to pull from pre and post tax sources and control what your taxable income ends up for the year. If all of your funds are pre-tax, then your income is whatever you pull from the account plus Social Security/pension income. No flexibility there. In retirement, flexibility is a key component to success.

2 Comments   |  Flag   |  Sep 10, 2014 from Knoxville, TN
Jeremy M. Shafer, CFP®

Careful with the immediate Roth conversion strategy, Eric. While it is permissible according to your custodian, the IRS may have a different view. See this article from Michael Kitces: http://www.kitces.com/blog/dodging-the-income-limits-on-roth-contributions-strategy-or-abuse/.

Flag |  Sep 10, 2014 near Midland, MI
Mukunda

Thanks to both of you, Eric and Jeremy.

Flag |  Sep 10, 2014

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I think Curt's comments are spot on. You really need to assess your income tax bracket and AGI and whether you will ultimately participate to the 401k plan this year to come up with the best option.

1 Comment   |  Flag   |  Sep 10, 2014 from Alpharetta, GA
Mukunda

Thanks Ted.

Flag |  Sep 10, 2014

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Thomas Larsen Level 5

Mukunda, Consider getting started with your employer-sponsored 401(K) retirement plan now. I recommend an initial 6% contribution rate (typically the rate required to get matching contributions). This way, you will already have familiarity with the plan once the matching contributions begin. It would be wise to add a Roth IRA (completely separate from your company plan) if you have investable dollars left over once your 401(K) contribution shows up on a paycheck stub.

Comment   |  Flag   |  Nov 15, 2014 from Vail, CO

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You can always change later! Just get started!!

Lots of good answers and info here, so I'll just add one more thing. A lot of folks like the 401k because you can contribute so much more to them -- $18,000 in 2015 if under age 50. IRAs are limited to $5,500 in 2015 if under age 50. If you're playing catch up from not having saved previously, you might need the higher limit to get on track to retire when you want to. Good luck!

Comment   |  Flag   |  Apr 21, 2015 from Alexandria, VA

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