A PHOTOS: SHUTTERSTOCK
ADVICE IS ALL OVER THE MAP regarding which type of retirement plan is best for accumulating retirement wealth. One common pearl of wisdom is: “Only contribute to your 401(k)/Thrift Savings Plan (TSP) to get the company match money. Contribute the rest of your money to your individual retirement account (IRA).”
Is this true? Generally, when you hear advice, think about who’s getting paid by following the said advice, so you understand the motive for their advice. Below is a breakdown of various retirement account
features and benefi ts. There are many varieties of retire- ment accounts. While this article focuses on the most common, you should be able to compare your plans and make your decisions based on these examples.
Contribution amounts The maximum contribution for a traditional or Roth 401(k)/TSP is $18,000 (or $24,000 for those age 50 and older). Traditional IRAs only allow contributions up to $5,500 ($6,500 for those age 50-plus). Roth IRAs are the same as Traditional IRAs until you
start hitting the annual income restrictions. Contributions can be limited or prohibited based on your level of income and tax-fi ling status. See IRS Publication 590-A for income limits on contributions. Neither version of a 401(k)/TSP has income restric-
tions. Employer-matching funds enhance 401(k)/TSP benefi ts. Given the principle of compounding, more usually is best.
Employer match Most employers provide a match for their 401(k)/TSP accounts. A match is company money added to your ac- count on top of your personal contributions. IRAs do not have this feature. The term “match” is literal in the majority of cases. The company will match what you contribute up to a maximum match percentage — the average maximum is 3 percent of gross pay. If your employer’s maximum is 3 percent, and if you contribute 3 percent or more, the company will add an additional 3 percent to your account. If you contribute less, the company will match your lower amount; if you contribute more, there is no match on the additional funds. Generally, whether you get a match or not, all other combined features and benefi ts of a 401(k)/TSP are tough to beat. The match is a nice perk.
Tax advantage People who contribute to a Roth vehicle want their tax ad- vantage in retirement, versus now. You get a greater future tax advantage contributing to a Roth 401(k)/TSP because of the $18,000/$24,000 maximum contribution amount
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