Retirement Accounts: How To Maximize

Some people have a choice of more than one retirement plan. For example, your employer itself might offer multiple plans, you might have an IRA, and you could even also have a plan through a business you own, such as a Simplified Employee Pension plan.

To get the most out of your retirement savings, consider using your available funds in the following order:

Step 1. Make Contributions To Employer Sponsored Plans That Provide Matching Contributions.

Some employer plans, such as 401Ks, tax-sheltered annuities and ESOPS, sometimes have a "matching" feature, which is an agreement by the employer to contribute to your plan a certain amount of money for every dollar that you put in. The amount of the match varies, but is usually between ten cents and a dollar. Your employer will usually limit the amount of its match by stopping the match after contributions reach a certain percentage of your salary.

Using the employer-matching feature is like being paid extra to save money. Once you've been with your employer long enough (usually for five to seven years), you will generally own (be vested in) all the money your employer contributes on your behalf. Under most plans, you will also own the money you contributed.

Most plans also provide for vesting (your immediate and full ownership) of all money in the plan upon retirement due to disability.

If your employer offers a plan with matching contributions, consider putting money you have available for retirement savings into that plan first, at least to the point where your employer stops matching your funds.

Step 2. Contribute To Other Plans That Allow Deductible Contributions

Some employer plans allow you to make tax-deductible contributions even if they don't have a matching feature. Also, whether you have an employer plan or not, you might be able to contribute to an IRA and take a tax deduction each year for the amount you contribute. IRAs will save you money on your current income taxes and allow the money you contribute to grow tax-deferred.

For some people, plans which accept non-deductible contributions, (such as a ROTH IRA,) might allow you to realize the highest after-tax return on your savings. Ask your accountant or other financial professional to create an illustration (a "pro forma statement") to help you choose between deductible and non-deductible contributions.

Step 3. Contribute To A Roth IRA

You also might be eligible for a Roth IRA. Depending on your individual circumstances, a Roth IRA might be even more beneficial than a traditional one. (To learn more, see: Roth IRA)

Deciding whether or not to open an IRA, and choosing between a Roth or Traditional IRA, can be difficult. Visit our IRA information to help you make that decision.

Step 4. Consider Other Plans To Which You Can Make Non-Deductible Contributions.

Some plans permit you to make contributions on an after-tax basis after you've reached the limit for deductible contributions. Check your plan to see if it's possible.

Although you won't be able to take a current income tax deduction for these contributions, you with still benefit from tax-deferred growth.

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