Retirement Account Contribution Priorities

You have a job. You can pay all of your necessary bills each month. Now you want to save for retirement. Good. You should!

But how? So many different accounts, so many ways to save.

Well, I'm here to help. And today let's forget about the investments. Let's just focus on where to put the money.

Here are the usual retirement savings choices:
1) employer-sponsored retirement plans (like 401k, 403b, TSP, 457b, and pensions)
2) individual retirement accounts (IRA, Roth IRA)
3) taxable brokerage accounts

All of these accounts allow you to hold cash or invest. Investment options vary, but typically you can at least use mutual funds.

Options 1 and 2 offer tax-deferred investment growth, and you may also be able to deduct your contribution amount from your taxable income each year.

Option 1 sometimes offers additional contributions from your employer--a very nice fringe benefit!

So, how to do all this?

First, take the "free money". If your employer offers "matching" or "profit sharing", contribute enough to earn the maximum offered. That's a no-brainer, but I'm saying it anyway!

Second, if you are eligible to contribute to a Roth IRA, do it. Any investment growth is free of capital gains taxes, AND the money comes out of the account tax-free in your retirement years. You can put in up to $5000 per year ($6k if you're 50+ yrs old). If you can't use a Roth IRA, then go to the next step.

Third, go back to the plan at work and top it off. You can contribute up to $16,500 per year. If you make $100k and get a "match" on the first 6% of your salary contributed, then you put in $6k right away. Then you put in $5k to the Roth. So, here now you can put in another $10,500 into the plan at work.

Fourth, if you can't use a Roth and have more than $16,500 to save each year, now is when you should fill-up your traditional IRA. $5k max per year, $6k if you're 50+.

Fifth... it gets complicated, and most folks do not get this far. But try!

If you can afford to save into the 401(k) and the IRA--a total of $21,500 per year--congrats! You are among the few and the proud.

If you make less than $200k per year and you are saving over $20k per year while still in your 30s, you are definitely on the right track.

If you're one of the so-called "rich" earning more than $250k per year, though, you may still need to save more. Think in terms of at least 10%, preferably 15%, and if you're getting a late start, 20% of your income should go into your retirement accounts.

Call me and we'll run a retirement projection so ballpark whether or not you're on track.