Max Out Retirement Accounts

Your next job is to max out your retirement accounts. You should do this (with one exception) after all your debts are paid off.

The one exception is when you have a 401k plan with your employer and your employer will match your contributions. This is free money, which is always a good thing.

In my case, my employer does not do contribution matching (damn!), so I need to choose between a standard IRA and a Roth IRA.

I found this online calculator on bankrate.com that I really like. (Unfortunately, it requires Java, so it doesn't work in Chrome. It does work in Firefox or Safari.)

The main determinant as to which type of retirement account you'll do better with is your tax rate. If your tax rate is higher now and will be significantly lower when you retire, a standard IRA makes more sense. If your tax rate will be the same or higher when you retire, a Roth IRA makes more sense.

Bear in mind that with the somewhat precarious financial state of the United States right now, it's likely that the tax rates for various tax brackets will increase in the future. Wikipedia has a great article on tax brackets as they are at present.

The idea is that with a traditional IRA, you do not pay taxes on the money you put into the account (your contributions are tax deductible). You do pay taxes when you take the money out (in your retirement) but since you're making less money then, you should come out ahead.

With a Roth IRA, your contributions are not deductible (do not reduce your taxes) but you pay no taxes when you take the money out in your retirement.

For me, a Roth IRA made the most sense. There's a few things I really like about them:

  1. When you withdraw from it, you pay no taxes or fees on the investment or on the gains from your investment.
  2. You can withdraw the principal (your contributions) at any time with no fees. Only the investment gains need to stay in the account until you retire. This gives you additional flexibility that I really value.

Whichever one you choose, pick one and max it out to the best of your ability. Only have investments in a non-retirement account if you've maxed out your contributions, or if you plan to use the principal and interest before retirement.

What are we doing in the Schofield family? Because we're still paying off debt and my employer doesn't match, we're not contributing to any retirement account. (I was doing an automatic transfer to a conventional IRA each month in my pre-financial-competence days, but I've stopped that until we are debt-free.)