Your 401(k) may not be enough

AAA World Article

There’s no doubt Americans have a love affair with their 401(k) plans. But with memories of the losses experienced in the financial meltdown of a few years ago and the specter of rising health care costs looming, many future retirees are realizing that a 401(k) alone may not be enough. In fact, financial experts say tomorrow’s retirees will need 80 to 100% of their pre-retirement income just to live comfortably. With that in mind, more and more investors are supplementing their retirement savings with an old friend—the Individual Retirement Account (IRA). The good news is that you can contribute to an IRA even if you’re in a retirement plan at work.

There are two primary types of IRAs to choose from:

The original, or “traditional” IRA, allows retirement contributions to grow tax-deferred until withdrawn (potentially speeding their growth). Currently, you can contribute up to $5,000 a year, or up to $6,000 a year if you’re 50 or older. Eligible taxpayers can also take a tax deduction on their IRA contributions (eligibility phases out above certain adjusted gross income limits, and being in a retirement plan at work tightens these limits). 

ROTH IRA: By contrast, the newer Roth IRA offers tax-free growth. Taxes are paid up front—contributions are made with already-taxed dollars, so there is no deduction for contributions. That means contributions (but not earnings) can be withdrawn tax-free, without penalty at any age. That’s why many people use Roth IRAs for both college and retirement saving. Eligibility for contributing to a Roth IRA phases out above certain adjusted gross income limits. 

If you’ve contributed the maximum to your 401(k) and still have money left over for retirement savings, an IRA may be a great place to put it.

The content of this article is for informational purposes only. AAA does not provide financial advisory services and does not guarantee any particular outcome.