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Once you’ve tackled debt and saved enough towards at least 3-6 months of living expenses in an emergency fund, then you can start thinking about investing in long term goals.

This can include retirement, college education, owning a home or anything that warrants a longer term investment of time and money.  One thing to note which goes against Dave Ramsey’s advice in this area, put your retirement ahead of your child’s college fund.  Why?  You don’t have a second chance to save for retirement whereas your child will have several options to pay for college should they choose that route.

Let’s take a look at tax advantaged savings plans.  Tax rules are always changing so it’s important to be sure you’re maximizing your savings accounts to get them working as hard for you as you do for them!  Whether you’re a financial guru or the most you know about retirement accounts is that you have a 401(k) through your job, a good refresher course is always worthwhile.  First, a quick Cliffs Notes summary of some of the different plans out there.

  • A traditional 401(k) is a retirement savings plan offered by employers where both the employee and employer make contributions to the account.  Participant contributions are made pre-tax, grow tax-free, and are taxed upon distribution at retirement age.
  • A Roth IRA is a retirement account that can be opened by anyone, and participant contributions are made on an after-tax basis.  As such, distributions at retirement age are tax-free.  There are, however, annual contribution limits as well as income limits for participation.
  • A Roth 401(k) is not so much a plan in itself, but rather a feature that some employers offer as part of their retirement plan.  If offered, the employer allows you to contribute a portion of your 401(k) on an after-tax basis; this portion is distributed tax-free upon retirement.
  • A 403(b) plan is a close cousin of the 401(k) plan, only it is offered by non-profit organizations.
  • A SEP IRA is a retirement plan often utilized by small businesses, or perhaps more commonly, the self-employed.  It is administered through an IRA so traditional IRA rules apply.

For most of us, reading tax code is only slightly easier than deciphering a Rubik’s Cube.  So, the important disclaimer here is that any details and questions about these plans should be discussed with your financial professional.  That being said, the table below provides a good starting point for discussion purposes.  Pay special attention to the tax treatment of each plan as you’ll need to know this going into which ever plan you choose.
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  1. Retirement plans allow additional catch-up contributions for individuals age 50 or older.
  2. Employee can additionally contribute the maximum traditional IRA contribution IF the SEP IRA plan allows non-SEP contributions.
  3. While there is no income limit to participate, $250,000 is the maximum compensation that can be counted for purposes of contribution calculations.

While we may still be working on getting that personal trainer we vowed to get, now is the best time of the year to sit down with your financial advisor and check in on your nest egg.  If you don’t already have a financial advisor, ask your friends and co-workers for recommendations and get one!  You don’t have to be rich to have a financial advisor.  Their job is to get you doing the right things now so you will achieve your financial goals down the road (think of it as a personal trainer for your money).  A little financial planning goes a long way and is one resolution that is easy to keep!

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