More for your retirement: Going beyond your employer’s plan
When it comes to saving for retirement, your employer's retirement plan isn't the only option. Adding other types of accounts to your portfolio can complement your 401(k) or 403(b) and offer other benefits as well.
"There are good reasons to consider other savings options in addition to your workplace account," says Stephen Popper, managing director at SageView Advisory Group in Boston.
Consider the following suggestions:
Take advantage of individual retirement accounts (IRAs)
IRAs can offer tax breaks too. There are 2 primary kinds of IRAs, each with distinct benefits:
- Traditional IRAs may allow you to deduct contributions from your taxable income,* and returns are not subject to annual taxation. However, you do pay income tax on money you withdraw. And if withdrawals are made prior to age 59 ½, you may be subject to a 10% IRS penalty.
- Roth IRAs don't allow you to deduct contributions, but they do shield investment returns from annual taxation. If certain conditions are met, Roth IRAs offer federally tax-free distributions.
Is a Traditional IRA or Roth IRA right for you?
If you expect to be in a higher tax bracket in retirement, a Roth IRA might be the best choice.
If you are nearing retirement, however, or you think your tax rate may fall significantly after your career is over, you may want to consider a traditional IRA.
What about employer-sponsored retirement plans vs. IRAs?
IRAs may let you invest in virtually any publicly traded security. On the other hand, many employer-sponsored plans offer matching contributions, which double your contribution up to a certain percentage of your income.
Consider this strategy: First, contribute the maximum to your employer's plan to take advantage of any employer-matching contribution. Then, invest any additional funds in an IRA.
Consider deferred annuities
A deferred annuity is another type of tax-deferred investment account. Deferred annuities have two main phases:
- Savings phase: Premiums are paid into the annuity.
- Income phase: The time when the annuity may be converted into income payments.
However, withdrawals of deferred annuity earnings are taxed as ordinary income, and may be subject to a 10% IRS penalty if made prior to age 59½.**
Depending on the annuity, premium payments for a deferred annuity can be made with either a lump-sum contribution or a series of contributions over a period of time.
There are two basic types of deferred annuities:
- Variable annuities are designed for retirement savings. They offer a range of long-term investment options in underlying subaccounts, with growth potential based on the performance of these investment options.***
- Fixed annuities offer a guaranteed interest rate for a specified period of time, such as 1, 3, or 5 years. When the guaranteed period is over, a new interest rate is generally set for the next period. Earnings accumulate tax-deferred until the income is needed at a future point in time, usually for retirement.
Fixed annuities are typically a more conservative investment option than variable annuities. This is because retirement funds in fixed annuities grow steadily and are not subject to the volatility of the stock market.
Once you reach the point of retiring and needing income, both types of deferred annuities offer features that can provide a set regular income payment, for either a certain number of years or the rest of your life.
* Subject to certain limitations and restrictions.
** Any guarantees are based on the claims-paying ability of the issuing insurance company.
*** Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed by, any bank or savings association. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.