Your Most Important Financial Decision
Cut The Dramatics
Perhaps you have become a bit skittish about making decisions because everyone around you is so dramatic about making wrong decisions and then looking for someone to blame.
Do yourself a favor, do not let that apprehension about decision-making prevent you from making a very important financial decision. Your entire financial future hinges on your decision to choose the correct retirement investments.
Investor indecisiveness about selecting a retirement investment vehicle costs many investors a lot of money. It’s not easy nor obvious; choosing the best types of investment vehicles takes research.
Employer or Individual?
Is it better to invest in your 401k plan at work or are you better off investing in an individual retirement account? Perhaps in your financial situation an individual annuity or life insurance policy would be a good retirement plan supplement. Who knows? You won’t know until you learn the benefits of each type of retirement investment.
1st Choice|Best Choice|Employer Plans
If your employer offers a 401k or 403b retirement plan, sign up immediately and max out your contributions.
Money invested in a 401k or 403b will grow tax deferred; which means, delayed taxation on your money until withdrawal or distribution. All of your money stays in your investment account during your accumulation years since you are not paying taxes on it; therefore, your retirement investments will grow faster.
2nd Choice|Just As Powerful|IRA’s
The other tax-deferred retirement plans that are usually disregarded but can be just as powerful are individual retirement accounts (IRA’s).
You have two types of IRA’s, Roth’s and traditional’s. Timing of taxation and taxability are what make Roth’s and traditional’s different.
You have to decide if you prefer to pay taxes today or in the future. Do that by determining your current tax bracket and what it will be at retirement.
You also have to decide if you need a tax deduction to lower today’s income or can you pass that deduction up in exchange for some other benefit offered by a Roth IRA?
Traditional IRA Benefits
Traditional’s are tax-deferred. Your taxes are deferred until retirement. If you think that you will be in a lower tax bracket when you retire, a traditional would be a proper IRA choice.
- Your contributions are made with pre-tax money.
- Taxes are paid at your regular income tax rate at the time of withdrawal or distribution.
- A minimum withdrawal amount is required by law after age 70 1/2. The IRS uses a formula to determine your required minimum distribution (RMD).
- Your adjusted gross income determines if your contributions qualify for a tax deduction.
Roth IRA Benefits
Roth’s are tax-free at retirement. If you prefer to pay taxes now instead of at retirement, a Roth would be a proper IRA choice for you.
- Your contributions are made with after-tax money.
- Taxes are paid up-front, before you invest. No taxes are due at withdrawal or distribution.
- Contributions are allowed after age 70 1/2.
- Minimum withdrawals are not required.
- Roth’s do not offer any tax deductions.
3rd Choice|Often Ignored|Annuities
Until the last few years annuities have been dismissed as a good retirement investment. But in turbulent markets the guaranteed stream of income offered by annuities have become attractive to investors again. Other than social security, no other investment vehicle offers the life time stream of income that annuities offer.
You cannot outlive the money you invest into an annuity; regardless of market conditions. When retirees feel nervous about whether their money will last as long as they do, this feature becomes extremely valuable.
You invest after-tax money into an annuity and your earnings grow on a tax-deferred basis until they are withdrawn.
4th Choice|Always Forgotten|Life Insurance
A cash value life insurance policy can be a valuable retirement investment. Cash value builds up in the policy on a tax-deferred basis. Many retirees tap into this cash value during their retirement years to help supplement their retirement income.
To keep costs and fees down, purchase the policy at a younger age when your health is not a factor in the rating of the policy.
Good, Bad, Your Choice
What is a good retirement investment? That all depends upon your personal financial situation. There are several investment types to choose from and each one offers different benefits, you decide for you.