Question

What investments should you have in your 401k? If you don't have a 401k (or 403b), what are your options? Everyone has their own unique situation but the goal is the same: satisfying choices in retirement. Share your challenges and solutions.

Answer 1

A company that offers a 401(k) plan typically offers employees a choice of several investment options. The options are usually managed by a financial services advisory group such as The Vanguard Group or Fidelity Investments.

The employee can choose one or several funds to invest in. Most of the options are mutual funds, and they may include index funds, large-cap and small-cap funds, foreign funds, real estate funds, and bond funds. They usually range from aggressive growth funds to conservative income funds.

If your employer doesn't offer a 401(k)—or you are self-employed or a small business owner—you can open an individual retirement account (IRA). These accounts also offer retirement-oriented tax advantages, which differ depending on whether you choose a traditional or Roth IRA.

Even better, you can save in one in addition to a 401(k)—though, depending on your income and the type of account you choose, your contributions may not be tax deductible. Even in that case, however, the money in your account will grow tax free until retirement.

Though both IRAs and 401(k)s offer tax benefits, there are some key differences. With an IRA, the most you can contribute in 2019 is $6,000 a year ($7,000 if you're at least 50).

With a traditional IRA, you deduct the contributions from your taxes today, and pay income taxes when you start withdrawing decades down the road.

With a Roth IRA, you don't get to deduct the contributions from your annual tax bill, but once you start withdrawing, it's all tax free. Any growth is tax free, too. You also are spared required minimum distributions when you hit age 70½, which are mandated for traditional IRAs and for 401(k)s.

When deciding between a traditional or Roth IRA you do have to ask yourself if you're going to be in a higher tax bracket once you retire, and if the tax brackets in the future will bear any resemblance to today's.

While contributing to a 401(k) or traditional or Roth IRA has great benefits, like deferred taxes or tax-free growth, annual limits may prevent you from investing enough capital to enjoy a sufficient retirement income later. Supplementing a retirement account with a taxable account invested in an appropriate stock fund and bond fund allocation can supercharge your financial plan and support a desired outcome