Retirement Investment Planning: roth, keogh, 401k & IRA

Everybody agrees that planning for retirement is important, and the responsibility is increasingly shifted onto your shoulders. You've seen the papers reporting on the imminent death of Social Security, while corporations stampede to endthe secure, old-style retirement benefits in favor of cheaper cash plans. Socking away enough simoleans to carry you through your golden years makes sense, but what type of savings makes most sense for you?

• Important Steps to your Life for Retirement Planning
  So, you are saving up for retirement? That’s great!! You’ve already taken the hardest step- it’s hard to save up money because it’s so fun to spend it! Any money that you are saving for retirement is going to really help in the long run. However, how can you make sure that you are maximizing your retirement funds?

401K plans are popular with employees, and for good reason: they provide a painless way to save for retirement. The way they typically work is that your employer withholds a certain percentage of your salary which is invested straight into your very own investment basket. You never actually touch the money so it's like money you never had, thus decreasing temptation as holiday shopping season arrives. Simply put, it's savings on auto-pilot. A fresh college grad who starts saving 10% of her paycheck at her first job and maintains that habit can be reasonably sure of a comfortable retirement. Switching jobs? No problem, it's your money - you just move it around as you see fit.

However, there are two more big benefits for 401K plans. First, many employers pitch in matching funds. This is essentially free money. Let's say your employer matches the first $1,500 you save each year. In reality, this means you're buying $3,000 for $1,500 - not bad return on investment! There are few iron-clad rules when it comes to investing, but if your employer offer matching funds - save at least up to the matching limit and take the money.

Secondly, 401Ks are tax-deferred. That means you don't pay income tax for whatever you sock away into the plan (up to a limit, see IRS rules for current levels). Instead, you let your money grow without paying a dime to the taxman. Only when you actually start cashing out in your 60s or 70s do you pay tax. This is great news, since it lets your tax-free money compound for year, perhaps for decades. If you're in the 28% tax bracket, it means you have 28 cents MORE to compound compared to a taxable investment. Each year, those extra cents make a bigger and bigger difference.

An IRA, Individual Retirement Account, works similarly, except you set it up yourself. Like the 401K, you can sock away money each year without paying any taxes until you start making withdrawals. Since no employer is involved you don't get any matching funds, nor is the money withheld from your paycheck. You can, however, work with a financial institution (bank, mutual fund company, brokerage etc.) so that the money is automatically deducted from your checking account on payday.

Roth IRAs are a bit different. Here, you pay tax right up front, according to your current tax bracket. However, you don't have to pay taxes as the money grows in your account - and you owe nothing when you start withdrawing funds. Furthermore, you have more flexibility since you are not restricted by a pre-set selection of funds. With a Roth, you set up an account with a broker where you can buy stocks, bonds and whatever else you think will have you ride to the golf course in a Rolls Royce.

Lastly, Keoghs are similar to IRAs for self-employed people, except Keoghs have much higher contribution limits (typically up to $30,000 a year). Keoghs come in three flavors: profit sharing, money purchase and paired Keogh. Each option comes with specific sets of benefits and limitations, so I recommend discussing the matter with your accountant to figure out which option is best for you. On a side note, it is worth mentioning that there is a new option for self-employed that became available in 2002. The Self-Employed 401K has higher contribution limits, fatter catch-up contribution limits and more options for loans against the balance. Make sure to compare all options carefully.

• Senior Years's Financial Planning
  Save and invest money now, for your future. Make investments, keep a savings account strictly for retirement and talk to retirement experts about other ways you can build your income for your senior years. If you make a good living now, consider investing a large portion of the money in your future, rather than spend it on going out to eat and seeing a movie...

So which option is best for you? It depends largely on your current and future tax bracket. Are you currently in a relatively high tax bracket and expect your income to dip significantly once you retire? Then a 401K or IRA is probably for you. But if you're currently in a low tax bracket and you anticipate to be in a higher bracket (make more money) by the time you retire, a Roth may be a better choice. If you're self-employed, a Keogh or Self-Employed 401K is probably the way to go.

Finally, be advised that there are some pretty tough rules surrounding all these options. You should check with your accountant or review the IRS web site for details on rollovers, loans against your funds, emergency withdrawals, contribution limits, earnings phase-outs and a slew of other stuff that may change by the year. As a rule, however, as long as you just save money and wait for the golden years you have little to worry about.

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