Do you need to know the five best individual retirement plans? If you’re shopping for retirement savings options, the list can be overwhelming. Here are five that we like, the reasons we think they’re you’re best choice, and the potential pitfalls of each.
- Rollover IRA. Many make the mistake of leaving 401k money in an old plan or rolling it over to a new employer plan. Neither of these options beat rolling old 401k money to a Rollover IRA because 401k’s generally have fewer investment options than an IRA. Also, if you continue working for a company for many years, using a Rollover IRA allows you to buy some investments not included in the 401k plan, offering you better diversification. Rollover IRAs have custodial fees and trading costs, and contributions outside of rollover monies aren’t allowed. Find out your broker’s fees before rolling your old 401k to a Rollover IRA.
- Roth IRA. Can you say “tax free money?” Roth IRA dollars don’t have any tax advantages when money gets deposited, but all gains grow tax free forever. Funds initially contributed to a Roth can be taken out at any time, but gains must stay in the plan for five years or until 59 ½, whichever is longer. Roth IRA tax free status is usually better for younger investors because funds have more time to create compounded, tax free interest.
- Traditional Contributory IRA. If you need a tax break, consider this option because money invested gets deducted off your income tax statement. Money needs to stay in the plan until 59 ½ or you meet an IRS qualifying distribution event, such as a financial hardship or disability. Money will get taxed when withdrawn, so if comparing this to the Roth IRA, generally this makes more sense for older investors.
- Individual 401k. Are you self employed with no employees, and want to contribute more than the traditional IRA or Roth IRA allow? An Individual 401k plan may be for you. Although administration expenses are higher and fund choices may be limited, individual 401k contribution limits are far higher for most investors. Because individual 401k contributions are a percentage of income, you must show some earnings to qualify to put money into this plan.
- Flexible annuity with lifetime guarantees. “Guarantee” is the favorite word of many investors, and annuities offer some good ones, such as the ability to invest in stock market based investments with principal or minimum lifetime income guarantees. Contribution limits are usually the highest of all five of the choices listed here, but annuity companies have stringent requirements for withdrawal, and many plans may have high fees.
“Individual Retirement Arrangements” Internal Revenue Service; http://www.irs.gov/pub/irs-pdf/p590.pdf
“401k Investment For Your Retirement” retirement.php