My Top 3 Must Haves in a Retirement Account | Smart Switch: Personal Finance


It’s easy to fall into the trap of thinking that one retirement account is just as good as the next. You can stash money in a 401(k) just because you have access to one. But that doesn’t mean it’s the best place for your savings right now.

Taking the time to understand the benefits and limitations of all the retirement accounts available to you is key to building your savings quickly. These are the top three things I look for when deciding where to invest my retirement funds.

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1. Tax advantages

All traditional retirement accounts, such as 401(k), IRAs, and even self-employment retirement accounts, offer tax advantages. Some accounts are tax-deferred, meaning you get a tax break for contributing to one of these accounts this year, but then you owe taxes on your withdrawals. Other accounts have Roth savings. You don’t get an upfront tax break when you contribute to one of these, but your earnings grow tax-free.

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The right time to pay taxes depends on how you think your income will change between now and retirement. If you think you’ll be in a lower tax bracket once you retire, tax-deferred savings generally make more sense. Otherwise, Roth accounts may be a better option.

You may not always be able to choose when to pay taxes. For example, if your employer only offers a traditional 401(k), he must defer taxes if he wants to use this account. But those who really want Roth savings could open a Roth IRA on their own and put their savings here first. Then, if they max out their Roth IRA, they could go back into their 401(k).

2. Flexible investment options

Some investment accounts, like IRAs, allow you to invest your savings in just about anything and change your investment strategy as often as you like. This kind of flexibility allows you to tailor your portfolio to match your goals and timeline. However, not all accounts allow it.

Most 401(k)s include only a handful of investment options that the employer selects on behalf of their employees. Sometimes these can be just what you need, and that’s great. But if you don’t like the investments they offer or if they come with high costs, that 401(k) might not be the ideal place for your retirement savings.

There are a few ways to handle this. First, as discussed, you could open an IRA and put your money in there until you’ve maxed out. Then you could go back to your 401(k). Or you can use your 401(k) first until you’ve claimed the full employer matching contribution, if one is offered, before switching to an IRA or another retirement account that offers more flexibility.

Or you can try the direct approach and talk to your employer about adding more investment options to choose from. Index funds are a popular, low-cost investment that allows you to quickly diversify your portfolio. These can serve as a great foundation for your savings if you can convince your employer to offer them.

3. Simple account management tools

A great retirement account should allow you to quickly see how much money you have in your account and what it is invested in. It should also allow you to change your contribution amount and investments without jumping through too many hoops.

You don’t need to review your retirement account every day, but you should review it at least once or twice a year and rebalance your portfolio as needed. You may also want to increase your annual contributions over time if you can. But you’re less likely to do any of this if accessing your account information is cumbersome.

What are your essentials?

I also look at other factors when weighing potential retirement accounts, such as their annual contribution limits and fees. But these three are what I look at first.

It’s okay to evaluate your retirement options a little differently, but keep these ideas in the mix. It’s a good idea to review all the possible investment accounts available to you and weigh the pros and cons from time to time to make sure you have your money in the best place.

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