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The Road to Retirement: 401ks, IRAs & More

A look at Americans' options among retirement plans

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President Obama just fired a shot across the bow that every American with a retirement account should heed.

In his budget proposal for 2015, Obama is proposing that Social Security shortfalls be financed by means previously considered politically untouchable. The president will recommend that high-income taxpayers have the amount of their salaries eligible to be deferred in 401k plans, IRAs and other retirement vehicles be curtailed as a way of generating more tax revenue in the here and now. Worse, the total assets that could potentially be held in tax-deferred retirement accounts would be capped at approximately $3.4 million.


It’s worth mentioning that these proposals have little chance of getting past the Republican-controlled House, and that even many Democrats would vote against it, given that it could cost them their seat in Congress. Plus, even if the proposals were to come to fruition, they would not affect most American savers. If you have your IRA capped because you have more than $3.4 million in it, this is what I would call a “high-quality problem.”

Still, the president’s proposals are noteworthy because they break longstanding taboos about the sanctity of retirement accounts and they set a dangerous precedent. Today, IRAs are being capped. Tomorrow, will they be seized?

Personally, I don’t see that happening … but then, 50 years ago, few would have seen the traditional corporate pension plan giving way to the 401k.

Retirement planning is a practice that is constantly evolving, and we have to keep up with the times. So, let’s take a look at the current retirement landscape and go over the various investment options available to you.

401k Plans

The 401k is the lynchpin of most Americans’ retirement plan and with good reason. They are widely offered, easy to understand, and your employer takes care of most of the burdensome paperwork and even makes your contributions for you via salary deferral. You also get an instant tax break, and your dividends, interest and capital gains accumulate tax-free until you take distributions in retirement.

Plus, because of employer matching, a 401k plan often ends up offering instant returns that you simply can’t get elsewhere.

What do I mean by that? It’s hard to beat instant 100% returns. And that is precisely what you get when your employer matches your 401k contributions dollar-for-dollar. Not all employers match, and some are more generous than others. But most employers offer matching in the ball park of 3% to 6%. If you don’t take advantage of this, frankly, you deserve to starve in retirement.

If you can afford it, I recommend you max out your annual 401k contributions; in 2014, that amounts to $17,500. However, for many Americans — and particularly young Americans — $17,500 is simply too much to part with in a given year.

But you can afford to put in the 3% to 6% that your employer is willing to match. And if you can’t … well, you probably need to re-evaluate some of your lifestyle choices. That 3% to 6% compounded over a working lifetime can make the difference between retiring in style and moving in with your kids.

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