Armchair Millionaire Community Bulletin: Clearing out the Retirement Plan Haze

There is no perfect retirement plan, and the one that is best for you may be different at different parts of your life. By knowing the advantages and disadvantages of each, you can make the right choice.

New York, NY (PRWEB) May 14, 2005 -- In our consumer society, we tend to assume that more choice is always better. However, when it comes to making investment decisions, this isnt necessarily the case. Some people simply have choice overload"--faced with many options that they may not understand, they simply make no choice at all. A 2003 study by three researchers at Columbia Business School, for example, found that the more investment options offered by a 401(k) plan, the less likely workers were to participate in the plan.

Two comments from the Armchair Millionaire community about choosing retirement plans show just how complex these decisions can be:

I max out my 457 plan (the public sector version of the 401(k)), and my Roth IRA. I also will be able to draw on a pension from my job beginning at age 55, but I treat it as if it won't be there. That way, if the pension plan doesn't go bust, I'll be pleasantly surprised."
- mysticaltyger

My wife and I fully fund our Roth IRAs each year ($3,000 each), I fully fund my 401k ($12,000 per year), my wife's 401(k) is funded at approximately $4,500 year, we both contribute to employee stock purchase plans (a total of $2,500 year) and we fund our moderately aggressive portfolio at $500 per month. As professionals in our early 30s, we hope to retire by the time we're in our mid-50s with this strategy."
- DHS

You could spend years trying to figure out which is the very best retirement plan, and fail to start investing at all. Its far better to dive in and get your feet wet than it is to delay investing indefinitely. My guide will give you the basics on the major retirement plans that will help you make a decision.

The Armchair Millionaire's Guide to the Most Popular Retirement Plans

Roth IRAs. A Roth Individual Retirement Account is a personal retirement savings plan. The pros: Your money grows tax-free forever--you wont pay any tax on withdrawals when you retire--and your investment choices are nearly limitless. The cons: You can only contribute up to $4,000 per year (in 2005), plus another 500 bucks if youre over age 50. And you may not be able to contribute at all if your income exceeds certain limits.

Traditional IRAs. The traditional IRA is--you guessed it--also a personal retirement savings plan. It differs from the Roth primarily in its tax treatment of your contribution and earnings. The pros: Tax on earnings in a traditional IRA is deferred until you make withdrawals from your account during retirement. If your income meets IRS guidelines, your contribution is tax-deductible. And like the Roth IRA, you can have a wide range of investment types in a traditional IRA account. The cons: Like the Roth IRA, you cant contribute a lot in any given year--up to $4,000 in 2005, or $4,500 if youre over age 50.

401(k)s. This is an employer-administered retirement plan that enables you to have money deducted directly from your pay into your account. The pros: Your contributions are pre-tax, your earnings grow tax-deferred until you make withdrawals and most employers match some or all of employee contributions. Also, you can contribute a substantial amount each year--generally up to $14,000 in 2005 or 25 percent of your salary, whichever is less. The con: Some plans have inadequate investment choices.

SEPs. Simplified Employee Pensions are designed for small businesses and self-employed folks. The pros: SEPs are much easier for businesses to set up and administer than are 401(k)s, but otherwise offer the same tax benefits. The cons: Unless youre self-employed, you cant contribute to your SEP directly yourself. Instead, you have to depend on your employer to make a contribution on your behalf, which is up to their discretion.

The Bottom Line: There is no perfect retirement plan, and the one that is best for you may be different at different parts of your life. By knowing the advantages and disadvantages of each, you can make the right choice.

The Armchair Millionaire Weekly Survey: If disaster struck, would you be ready? Log on to www.armchairmillionaire.com and let us know.

Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at www.armchairmillionaire.com.

Contact Information:
Lewis Schiff
Armchair Millionaire
877-833-2823
http://www.armchairmillionaire.com

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