By Lissa McNaughton
Your plan for saving for retirement
may experience a great deal of change
between your first job and retirement.
No matter what changes or unexpected
events occur, it is essential to continue
The purpose of saving in a 401(k) plan
is to provide you with a financially secure
future. It sounds easy, but getting from
Point A to Point B can be complicated.
Economic factors and life events can affect
even the best-laid plans. The following
addresses common questions about
retirement accounts including 401(k)s,
Roths and IRAs.
A Roth 401(k) allows you to contribute
to your 401(k) plan with after-tax dollars
and grow your money tax-free. A Roth
401(k) is not a separate account but
rather a potential option within a 401(k)
plan. When you retire, withdrawals from
a Roth 401(k) are not taxed.
A traditional 401(k) allows you to contribute
to your plan with pre-tax dollars
and your money will grow tax-deferred.
When you retire, withdrawals from a
traditional 401(k) will be taxed. Pre-tax
contributions lower your current taxable
income and, consequently, your current
There are annual limits as to how much
you can contribute to your 401(k) – Roth or pre-tax. In 2014, you can contribute
up to $17,500 or $23,000 if you are age
50 or older. However, there are no income
restrictions as to who can take advantage
of their 401(k) plan.
A Roth IRA allows you to contribute
up to $5,500 (or $6,500 if you are age
50 or older) of after-tax dollars. Your
investment grows tax-free and qualified
withdrawals are not taxed. Roth IRAs are
also not subject to the minimum distribution
There are income limitations, so not
everyone can use the Roth IRA. For
example, if you’re married filing jointly
and your adjusted gross income is over
$188,000, you cannot make a Roth IRA
A traditional IRA allows you to contribute
up to $5,500 (or $6,500 if you
are age 50 or older) and your money
will grow tax-deferred. When you retire,
withdrawals from a traditional IRA will
be taxed. Your contributions may or may
not be deductible depending upon your
You should not assume your tax rate
will be lower in retirement; this may not
be the case. There is no one right answer
for deciding how much to place in pretax
and Roth accounts. If you expect to
be taxed at a higher rate in retirement,
you may want to consider saving in the
Roth 401(k) or IRA. If you expect to be
taxed at a lower rate in retirement, you
may want to consider saving in the pretax
401(k) or IRA.
However, because we can only speculate
about future tax rates, a good course
of action would be to diversify the tax
treatment of your retirement savings
by splitting your savings between a traditional
and a Roth 401(k). You should
always take advantage of any employer
matching contributions before saving
outside of your 401(k) plan.
What happens if the plan provider is in
Your plan is safe, even if an employer,
plan provider, custodian or recordkeeper
is in financial trouble. Your money is
held in a trust, the assets are not owned
by the plan provider and the funds are
not subject to the claims of creditors.
In the event of a company’s decision to
terminate your plan, you will receive
notification and rollover forms. Your plan
may go through some alterations, but your
savings are secure.
It is not unusual for an individual to
acquire several retirement plan accounts
over different phases of a career. When it
comes to retirement accounts, simplicity
is key. Having several plans may seem like
a fail-safe in troubled times, but from a
personal bookkeeping perspective, it will
be easier to keep track of and maintain
fewer accounts when retirement begins.
Holding fewer accounts may also reduce
account expenses paid over time.
If your current employer offers a plan
with reasonable costs and diversified
investment choices, consider rolling
small accounts into your current plan
(as long as your plan allows for incoming
rollovers). If your employer does not offer
reasonable options, such accounts can be
moved into an IRA or Roth IRA.
(Roth 401(k) accounts are eligible
for rollover distributions into Roth IRAs
upon retirement or separation from employment.
Traditional 401(k) accounts,
on the other hand, can be rolled into
traditional, rollover IRAs).
Saving for retirement before saving for
a child’s education may seem surprising.
However, it is a wise approach for securing
the future for you and your family.
One reason for prioritizing saving for
retirement would be the financial stress
potentially placed on a family if an individual
reaches retirement age without
enough saved to live independently.
Additionally, you may be entitled to
receive a matching contribution from
your employer. You would, certainly, want
to maximize the match to the extent your
cash flow allows.
While college loans are more difficult
to obtain in today’s economy, it is easier
for a student to obtain a loan to pay for
education than for a retiree with fewer
options for borrowing. Ideally, of course,
something would be set aside for each
You should start saving in a retirement
plan as soon as you start working.
Although it’s hard to believe you’ll ever
be 60 or 65 when you’re just starting out,
time has a way of catching up with you.
A 25-year old who saves $100 each week
until age 65 and earns 6 percent will
accumulate over $800,000. A 45-year old
saving $100 each week to age 65, earning
6 percent will accumulate just $191,000!
Time makes a big difference.
When you save for retirement, you are
saving for the long run. Over time, you
should expect cycles of volatility. But
when it comes to retirement plans, time
is the greatest asset. If you ignore market
noise and stick to your existing plan, you
give yourself a better chance of remaining
on course to achieve your long-term
McNaughton is a director with
SMF Financial Advisors, the wealth
management division of SaxBST.
Photo Courtesy SaxBST