Knowing I’m an active investor, a buddy of mine was asking me questions after having suffered a hit to his retirement funds, as have many people this last couple of years. I figure maybe I would start writing a few articles on the topic as it occurred to me I really geek out on this stuff more than others.
I don’t like telling people what to do with their money and you shouldn’t listen to anyone either. Rather, I suggest educating yourself as much as possible and making your own investment decisions. Perhaps I have no idea what I’m talking about, either. Another thing to keep in mind is I still have probably 30 years to retire so if you are closer to retirement age you might make more conservative investment decisions.
So I’ll start with the very basics and give a brief overview of types of retirement accounts.
401(k)
A 401(k) is the retirement account you usually get as a benefit from your employer. Your employer might offer a different kind, but this is generally the most common. The nice thing about these accounts is they are tax deferred, meaning the contributions that you make are tax deductible, and are automatically deducted from your paycheck. However, when you retire and start withdrawing funds from your account, you will be taxed on your gains that you’ve made over the years.
You can contribute up to $16,500 a year for both 2009 and 2010 and some employers offer matching contributions up to a certain amount. If you have an employer that matches, put at least as much as they will match. This is free money!
Usually your employer has some other company manage the 401(k) plan. Many times this is some financial services company like Fidelity. They will offer you a handful of funds you can put your money into and will often encourage you to use their own funds. I typically choose an index fund. I’ll tell you a little more about why later. But basically, their management fees are lower (watch out for those fees), and most funds have difficulty beating the broader market anyway. You may also be able to invest in your company’s stock. But, be careful. This is how a lot of Enron employees got screwed.
Rollover IRA
Rollover IRAs are Individual Retirement Accounts. They are often called “Rollover” because you can roll over your 401(k) into these accounts when you leave a job. I do this for two reasons. One is to consolidate all my retirement plans. The other is you can open Rollover IRA’s with discount brokers such as E*trade or Ameritrade. This gives you endless investment options through stocks and ETFs. Exchange Traded Funds are funds you can trade like stocks. They have ETFs for everything. Stocks, bonds, and even commodities like gold and oil. Rollover IRAs work like a 401(k) where contributions are tax deferred.
You can contribute up to $5,000 a year to an IRA for both 2009 and 2010. You also have until April 15th to make your yearly contribution. For example, you have until April 15, 2010 to make contributions for the 2009 tax year.
Roth IRA
A Roth IRA is a little like a traditional IRA with significant tax advantages, especially if you are younger. It is NOT tax deferred, but when you make your withdrawals they are tax free! If you are compounding gains over 30 years this can be a significant amount of money. You can also open Roth IRA accounts with discount brokers.
You can contribute up to $5,000 a year to a Roth IRA for both 2009 and 2010. You also have the same deadlines as a traditional IRA to make your contributions. I like to max this account out before contributing to tax deferred accounts because of the tax advantages, unless my company matches for my 401(k).
Okay, so that’s it for retirement plans. Wikipedia looks like it has some good articles if you want more info. Good luck and happy investing.
