Retirement Investment Decisions

With the downturn in the economy, a lot of companies, and not just small companies, are having to rethink the benefits they offer their employees. One of the benefits on the chopping block is 401(k) employer matching. Walter Updegrave, Money Magazine senior editor says:

As a way to reduce expenses in the face of this economic slump, a number of companies, including FedEx, GM and Motorola, have either eliminated or reduced matching contributions to their 401(k) plans recently.

If you find yourself in this situation what should you do? First, let’s review the benefits of some of the different retirement opportunities.

Retirement opportunities

1. 401(k) – Offered through your employer and usually comes with some sort of match. Often the number of options in which to invest is very limited, but the match is free money. Combined with the fact that your contributions are pre-tax, which lowers your overall tax liability, you have a pretty good investment tool.
2. Traditional IRA - Also, comes with the benefit of pre-tax contributions, but is done outside of your employer so there is no match. The upside is you can usually select from about 6,000 different mutual funds in which to invest, so you have no excuse for not feeling ‘in control’ of your money. Like the 401(k), the entire fund is tax deferred so you will be responsible for all of the taxes when you start making withdraws.
3. Roth IRA - The most restrictive of the retirement opportunities. Unlike the 401(k) and Traditional IRA, the Roth IRA uses after tax contributions. This means that you will use money that you have brought home, but the benefit is there is no taxes on any of the growth. Another difference between the Roth and the Traditional IRA is that you can withdraw the principle contributions with no penalty. However, there are income restrictions for the Roth IRA, and the contribution amount is much smaller than either the 401(k) or the Traditional IRA.

So what should you do?

If your employer stops matching your 401(k) contribution then there is really no reason to continue investing your money there. You should leave the money you have in your 401(k) right where it is, but unless you need tax deferred income, I recommend contributing to the Roth IRA up to the maximum amount. The tax free growth is just too good to pass up. You will have to be a little more disciplined because the money is actually going to be coming out of your pocket, instead of your paycheck. I would encourage you to set up an electronic payment into your Roth IRA as part of your monthly budget, that way you aren’t tempted to spend your retirement money today.

One other thing that you may want to consider is converting your 401(k) or Traditional IRA over to a Roth. The benefit is the tax free growth. The downside is you have to pay the taxes on the converted amount now. The whole conversion process is somewhat complicated so check with an investment professional if you are thinking about converting to a Roth.

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Tagged as: 401K, mutual funds, Retirement, Stock Market