Retirement Savings Accounts: The Specifics

By Brittany Goodwillie, CFP®

In my last blog post, I explained the basics of the different types of retirement savings accounts.  You may understand your choices, but which type of account is best for you to contribute to?  Should you choose Roth or Traditional contributions?  How much should you contribute?  Which investments should you choose?  It’s impossible for anyone to give you all of the right answers to your questions without knowing your specific situation, but here I'll outline some of the most common questions I’ve heard and some things to think about to help you arrive at the best answer for you.  

"Which type of account should I contribute to?" 

Do you get an employer match?

If you get an employer match, contributing enough into your employer-sponsored plan to maximize your employer match is almost always a good idea since it’s basically free money to you.

What is your vesting schedule?  

Most plans have vesting periods, which means that the money matched by your employer only becomes yours after you have worked at the company for a certain number of years.  Sometimes the money is yours right away, while other times you may need to wait up to six years until you are fully vested.  If you plan to leave your company before the match vests, contributing to your employer-sponsored plan solely for the match may no longer make sense.  

What are your investment options and fees for each account?

Every employer retirement account has different options and fees.  I’ve seen plans with great investment options at a low cost, and other plans with horrible options and high fees.  The benefit of investing in an IRA is that you have many investment options.  And if you hire someone to manage your IRA, they can make adjustments for you so that you don’t have to worry about changing the allocation yourself.

"How much should I contribute?"

Do you have debt?  

Depending on the interest rate of your debt, it may make sense to pay off your loans before making the maximum contribution into your retirement accounts.  

What are your other goals / expenses?  

How much you need to save depends on your retirement goals.  You may need to contribute the maximum amounts to your retirement accounts and then save more elsewhere.  Or, it may make sense to save somewhere other than your retirement accounts if you have a short-term goal that will need to be funded, such as saving money in a 529 plan for college or saving cash to fund a large purchase.  In a financial plan, we project your income and expenses, and help you determine how much you need to be saving and the best place to save your money given your goals.

Do you have other, better alternatives available to you?

If you are married and collectively only have enough to fully contribute to one workplace plan, sometimes the options in one plan are better than the other spouse's plan.  If you qualify for an HSA, it also may make sense to prioritize maximizing contributions to an HSA before your employer-sponsored accounts. 

"Should I make Roth (after-tax) or Traditional (pre-tax) contributions?"

Are you young or expecting to make more money later on in your career?  Is there a unique situation where you are currently in a lower tax bracket than normal?  Do you have a strong view that tax rates will increase in the future? 

Roth contributions are made after paying tax, meaning that you won’t save any money in taxes today, but you will not have to pay tax on the distributions later on in life.  If you are young and in a lower tax bracket than you will likely be in the future, making after-tax contributions may make the most sense.  Keep in mind that not all employers offer Roth accounts, and only individuals below certain income restraints can contribute directly to Roth IRA accounts.  

Are you in a high tax bracket now with the expectation of a lower tax bracket in retirement?  

The money that you contribute to a traditional, pre-tax account reduces the amount of tax you will have to pay the year you make the contribution.  Your contribution grows tax-deferred, and you are required to pay tax on any distributions in the future. A pre-tax contribution may make sense if you are in a high tax bracket now and will likely be in a lower tax bracket when you distribute money from your account. 

"Which investments should I choose?"

This question is one of the most common questions we get because many retirement accounts don’t give guidance on which investments to choose.  Because everyone's options and fees are drastically different, I encourage you to seek out an experienced advisor to help you choose your investments.  At Autumn Financial Advisors, LLC, we take the time to review your retirement plan investment options and fees to let you know which investments we recommend.  Unlike many other firms, we don't charge clients management fees for accounts that we don't have discretion over.  Our process of helping our clients choose investments for employer-sponsored retirement plans involves applying our framework the best that we can with the limited options available in your plan.  Our primary goals are diversification and an asset allocation appropriate for your time horizon.

"Is there any other type of investment account I should consider using?"

Is an insurance policy a good investment?

Typically, my view is that if a product is not meant for investing and saving for retirement, it’s probably not the best product for investing.  I’ve had multiple single individuals ask me if they should invest in a cash value insurance policy because someone is convincing them it is the best way to save money for their future.  Most of the time, an insurance product is NOT the best way to save for retirement.  Insurance is called insurance for a reason; it is meant to insure you against a risk.  When you are using insurance as something it’s not intended for, it can be complicated, it can be messy, and it can have unintended consequences.  Insurance salespeople make money when they sell you something, so they will likely try to convince you that a policy is the best choice for you because they are making a big commission from selling it to you. Sometimes these salespeople really do believe a product is the best for you because they don’t know much about other investments, which is why it is best to seek advice from a CFP® professional, who is required to have experience and knowledge.

Should you invest in an annuity?

Annuities can make sense in certain situations, but if you are purchasing an annuity on the recommendation of somebody who is getting commission from that purchase, beware.  People who receive hefty commissions often try to sell a product as if it’s the best choice for everyone, instead of figuring out an individual’s needs and then finding a solution appropriate for them.  Before you make a decision on any type of annuity or insurance product, be sure the person giving you advice isn't directly benefiting from the sale, and if they are, get a second opinion first. 

Should any other account be used for retirement savings?  

There is one non-retirement account that I often recommend you maximize as a retirement savings vehicle if you have access to it.  An HSA or health savings account has a triple-tax-advantage, meaning you can put the money away with a tax deduction, it grows tax-free, and you can use it tax-free for medical expenses.  Though HSAs are not made specifically for retirement savings, many of your retirement expenses will likely be medical-related expenses.  Of course, the investment options you have in your HSA play an important role in this decision.  

I understand that this article may have left you with more questions than answers.  I am always available to answer your questions and you can schedule a phone call or set up a meeting to learn more about how to best invest your money.