Retirement Investment Options | Retirement

by JoeJames

Many people wonder what financial tool they should get- a 401(k) or an IRA? The answer really depends on your income. If you are loaded with cash, you can contribute to both. The question you have to ask yourself is this: Are you in a position to pay tax today and earn tax free income during your retirement days or you would rather defer your tax liabilities. In a Roth IRA scheme, you have to pay your taxes pre-investment but enjoy retirement without tax liability. With a 401 (K), your investments are tax free on the way in but taxable on the way out.

A 401k is an option that is set up by your employer. They give you a select number of stocks and mutual funds to invest in and you can set the ratio you want to invest in. This is an optional plan. The money is taken out before taxes meaning your contribution is not taxed. However, when you retire, the money you take out is taxed so if you are in a higher income bracket than when the money went in you will have to pay more taxes than you would. But your money does grow tax free and many employers will match you contribution.

In a 401(K), you can invest up to 14,000 dollars per year and that includes both your contribution and that of your employer. Employee and employer combined contributions must be lesser of 100% of employee's salary or $46k. 401(K)'s are good investment so long as your employer's matches your contributions. But the thing to think about is this: do you plan to be in a higher tax bracket when you are older? If the answer is yes, then you want to invest more of your money into an IRA.

An IRA is a pension scheme meant for individuals. You can decide on when to invest, how to invest and the amount which you plan to invest in a particular year. The investment limit is $5000 a year for age 49 or below; $6000 a year for age 50 or above in 2009. These limits are total for traditional IRA and Roth IRA contributions combined. Withdrawals are tax free up to the limit you have paid in. This is because you already paid taxes on them before you invested. Unlike a 401(K), this is made by you and not tied to your job. You can hold cash, bonds, or stocks. IRAs are subject to a lot of rules but are more flexible in terms of investments than a 401(K).

You should invest in both if you can but always invest in the 401k if your employer matches your contributions. You want to think about what your tax bracket will be when you are older too. If it will be higher, you would want to consider putting more money into an IRA. Both options are good and should be used but the balance of where you put the most money depends on the type of plan your employer offers and the amount of flexibility you want.

No matter what investment option you choose make sure you max out that option. Maxing them both out is better. That way you save the most money for your future and pay the least amount of taxes on it. Saving for your retirement is important and these two methods are the best way to do it.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Joe James gives financial advice for a living. He resides in the southwest of the United States and is a retirement specialist. You can find out more information at his website about financial information and advice.