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The
Priority Box
Now
that you know more than you ever wanted to about retirement plans,
you may be left with a final question: What do I do first? Here’s
a quick rundown of the rough order you should assign to your various
retirement-savings options:
1.
401(k) with employer matching. The best deal around. The match
alone can amount to an immediate 50% to 100% return on your money
(once you’re vested), and the 401(k) provides an upfront deduction
and years of tax-deferred
growth. Don’t put money in any other retirement account until
you have reached the limit of what your employer is willing to
match.
2.
IRA (Roth or deductible). The Roth IRA offers years of tax-free
growth. The deductible IRA offers tax-deferred growth and an upfront
tax break. Both offer a wider range of investment options than
401(k)s.
IRAs will also allow you to withdraw your money penalty free to
buy a home or pay for educational expenses.
3.
401(k)s without employer matching. If you’ve already contributed
the maximum to options one and two above, try to max out your
401(k)—even if it’s a stretch on your budget.
4.
Partially deductible or non-deductible traditional IRA. If
you have contributed the maximum to your 401(k) and you’re not
eligible for a deductible or Roth IRA, these accounts offer limited
tax advantages—tax-deferred compounding but little or no upfront
tax break.
5.
Taxable investment account. Once you’ve exhausted your tax-favored
savings options—IRAs and 401(k)s—you’ll have to save in a regular
old taxable investment account. To get the most from your money,
open your account at a no-load,
low-expense mutual
fund company.
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