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Two of the most popular vehicles to save for retirement
are 401(k) plans and IRAs. In order to reap the maximum benefit from both types
of plans, you may need to rethink how you allocate your savings between the two.
At The Henssler Financial Group our preferred savings strategy is designed to
maximize your after-tax return and investment flexibility. If
you are able to maximize your contribution to both your 401(k) plan and your IRA,
we recommend you do so. If you are unable to save the maximum permitted, the preferred
contribution sequence and allocation of investible funds is:
| 1st |
Maximum allowed for 401(k) with
employer match | | 2nd |
If you qualify, $4,000 into
Roth IRA | | 3rd |
Balance of allowable amount
for 401(k) | | 4th | After
having saved as directed above and you did not qualify for the Roth IRA or traditional
deductible IRA, you may contribute $4,000 to a traditional nondeductible IRA |
Example:
Joe, 45-years old, receives a salary of $100,000 per year from his employer
which offers a 401(k) plan which matches 50% of the first 6% of the employee's
contribution and allows a maximum of 14% to be contributed by each employee. Joe
can afford to save a total of $16,000 in his combined 401(k) and IRA accounts
for him and his wife Jill. Our
recommended savings strategy is: 6% or $6,000 employee contribution into his 401(k)
causing the employer to contribute $3,000. Then a $4,000 contribution into a Roth
IRA for Joe and $4,000 into Roth IRA for Jill. Finally an additional 2% or $2,000
employee contribution into his 401(k) which brings us to the targeted $16,000
for savings. Possible exceptions:
Minimizing
Taxes If your highest priority is
minimizing taxes in the year of the IRA contribution vs. future tax-free withdrawals,
you may want to choose a traditional deductible IRA (if you qualify) instead of
a Roth IRA. NEVER choose a traditional nondeductible IRA over a Roth IRA.
You Don't Like Your Options If
you did not qualify to make a Roth IRA or traditional deductible IRA contribution
and you don't like your 401(k) investment options, you should make a $4,000 traditional
nondeductible IRA contribution after contributing the maximum allowed for 401(k)
with employer match. You would then proceed to contribute the balance of the allowable
amount for the 401(k). Pre-Tax
vs. Post-Tax 401(k) Contributions If
my employer allows pre-tax and post-tax 401(k) contributions, follow the same
sequence as documented above with the following approach to 401(k) contributions.
In most cases, if there is a limit on the amount you can afford to invest, we
recommend using up the "pretax" allowable amount first and if you can invest more
after that, use the "post-tax" contribution category. Using "pretax" first allows
you to save a greater percentage in the 401(k) and still receive the same after-tax
amount in your pay check. When
to Call it Quits
With all this saving, you may be asking yourself
when you can "call it quits" and retire. The answer is simple: When
you have enough assets to achieve "financial independence." In other
words, you have enough assets to support the lifestyle you desire without continuing
to work. It does not necessarily mean
that you quit working, only that you don't need to work. A lot of successful financially
independent people choose to work because it is something they enjoy. Bottom
Line
At The Henssler Financial Group we feel that a combination
of a 401(k) and a Roth IRA will help maximize your return, while still maintaining
some investment flexibility. If you are still unsure of how much to allocate or
how long to save, we can help you determine the appropriate amount with the use
of a proprietary cash flow model. This cash flow pinpoints when you have acquired
enough assets to last for through your retirement.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
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