Investment Options for Retirement

Now that you’re beginning your career, it’s time to start thinking about retirement. As improbable as it might seem, there will be a day when you’re ready to stop working and you’ll need a financial cushion for your retirement years.

Like most recent grads and young professionals in California, you’re probably juggling a lot of debt from student loans, a car loan and maybe even a mortgage. All of those immediate obligations often make it difficult to focus on your future financial needs.

As much as possible, start setting aside money today for your retirement. If it’s too painful to subtract that money from your daily budget, take a close look at your expenditures. See if there are areas where you can cut back spending and divert that money toward your retirement portfolios. You’ll appreciate your efforts when you see your mutual fund investments grow after 5 or 10 years.

Retirement Plan Options, Taxes and Distributions

Many Silicon Valley employers offer a 401(k) retirement plan, either a traditional or a Roth. To bolster their retirement funds and diversify their holdings, many people also open a Traditional Individual Retirement Account (IRA), a Roth IRA or both. For all of these retirement plans, you will earn capital gains, dividends and interest without incurring any tax liability.

The difference in each plan’s tax structure applies to the contributions and distributions. With the Roth products, you contribute post-tax money, so your qualified distributions are not taxable. With the traditional products, you typically contribute pre-tax money, so you’ll pay taxes on the distributions. For the Traditional IRA, your contributions may be deductible depending on your situation.

Distributions on all 401(k) and IRA plans can begin at age 59 ½. You must withdraw funds starting at age 70 ½ for the 401(k)s (unless you’re still employed) and the Traditional IRA. Only the Roth IRA carries no mandatory distribution age.  

401(k) Details to Remember

Keep in mind the administrative fees of the 401(k) because they will eat into your earnings each year. If you believe these fees are too high, you can either opt out of your employer’s plan or alert your human resources department to your concern and suggest your company consider alternate plans.

But if you’re comfortable with the fees and investment choices, you can benefit from your employer matching your contributions up to a certain percentage. Essentially, this is free money you’re receiving for participating in the 401(k) plan.

Contribution limits for 401(k)s can change, so check with your company’s human resources department for the most updated information. The same is true with IRAs, and your accountant or wealth advisor can guide you.

Adding an IRA to Your Portfolio

You can set up an IRA to augment your employer-sponsored plan and obtain more control over your investments. Some IRAs are target-date funds tied to your expected year of retirement that will automatically adjust the risk of your holdings to more conservative as you approach retirement age. But many people enjoy customizing their investments and adjusting those occasionally based on a strategy they’ve created, sometimes with the assistance of a financial planner.

Again, take a look at the administrative fees associated with these IRAs to get the most value out of your investments. If you’re able to contribute money to both a 401(k) and an IRA, you’ll be able to diversify your holdings as you progress toward your long-term goals.

To dig deeper into these and other investment options, access more information from leading finance websites and trusted financial advisors.