Retirement plans are almost always considered a priority, and most people have some form of account in place. Once you decide to start saving, however, the real challenge is determining where and how. There are numerous options, and all have different advantages (and disadvantages).
Essex Financial VP and financial advisor James Sullivan explains that first, everyone needs to define a hierarchy for themselves. Once they do, the key is learning which savings platforms best meet their needs.
Getting your employer to match your 401(k) contributions is the best place to start. Once that’s done, consider your tax brackets but current and future. Pre-tax retirement accounts and IRAs are most suitable for those who predict lower tax brackets at the time of their retirement. Roth accounts, on the other hand, work well for those who anticipate higher tax brackets in the future.
“Frankly, we don’t know what the tax code will be next year,” let alone in a few decades, Sullivan cautions. He suggests considering your current age rather than tax bracket alone. He believes that 20 years is a good marker; if you have at least 20 years before retirement, a Roth account may be more advantageous. However, some employers will only match a regular 401(k), which you should choose over a Roth IRA. He explains that employer-sponsored plans are automated, which is a tremendous benefit. Small amounts are saved throughout the year, instead of a lump sum being contributed at the end of each year, when possible. Retirement plans that are sponsored by an employer are also protected from creditors, as opposed to IRAs which often are not.
Sullivan recommends switching from a 401(k) to an IRA later on in the process. “401(k)s are great for accumulation, but IRAs are much better for funding your retirement. Why have your former employer still involved with your finances when you don’t work there anymore?”