Going beyond your employer's retirement plan
Your employer's retirement plan isn't the only option when it comes to retirement.
Adding other types of accounts to your portfolio may help you complement your retirement savings. "There are good reasons to consider other savings vehicles 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 two primary kinds of IRAs, which have distinct benefits:
- Traditional IRAs
Traditional IRAs (subject to certain limitations and restrictions) may allow you to deduct contributions from your taxable income. In addition, IRA investment returns are not subject to annual taxation. You pay income tax on money you withdraw from the IRA, however.*
- Roth IRAs
Roth IRAs don't allow you to deduct contributions. But like a traditional IRA, the Roth IRA shields investment returns from annual taxation. Unique to the Roth IRA is that if certain conditions are met, it allows for federally tax-free distributions.
Traditional IRAs vs. Roth IRAs
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.
Compare Roth and traditional IRAs (PDF: 28.53 KB)
Employer retirement plans vs. IRAs
IRAs have certain advantages. In particular they may let you invest in virtually any publicly traded security. One potential approach: Contribute the maximum to your employer's plan to take advantage of an employer-matching contribution, then save the full allowable amount in an IRA.
Consider deferred annuities
A deferred annuity is another type of tax-deferred investment vehicle. Deferred annuities have two main phases: the savings phase in which premiums are paid into the annuity and the income phase in which the annuity may be converted into income payments. Withdrawals of deferred annuity earnings are taxed as ordinary income. If made prior to age 59½, they may be subject to a 10% IRS penalty tax. Any guarantees are based on the claims-paying ability of the issuing insurance company.
Depending on the annuity product, 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 long-term investing vehicles that are designed for retirement savings. Variable annuities offer a range of investment options in underlying subaccounts and offer growth potential based upon the performance of these investment options.
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.
If you are interested in taking less risk, fixed annuities offer a guaranteed interest rate for a specified period of time, such as one, three or five 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 income.
Fixed annuities are considered to be a more conservative investment option than variable annuities. 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 available features that can guarantee you receive a set regular income payment for either a certain number of years or the rest of your life.