If you work for a living, creating a proper retirement nest egg should be at the forefront of your mind. The sooner you start saving, the better chance you will have to be prepared for a comfortable retirement. How early you start saving and the amount you put away each time will play a large part in determining when you retire, but the way you invest your money will also play a role. Here are some potential investment options for your retirement and the pros and cons associated with each.
One of the most traditional investment options for retirement is the 401(k) plan. The name 401(k) refers to the subsection of the Internal Revenue Taxation Code that these plans are defined in.
One of the advantages of a 401(k) plan is that the money gets deducted automatically from your paycheck (tax deferred) and put into your 401(k). This is an advantage for two reasons, as it is both convenient and easier to save money since you don’t see the money before it is invested. However, “tax deferred” does not mean “tax free” and the money that you withdraw from a 401(k) does get taxed.
Another major advantage of 401(k)s is that many of them come with “company match”, which means your employer will match the amount of money you put in. This is a tremendous benefit as it is basically free money. Taking company match into account, you can also utilize a retirement calculator to help determine how much you should be contributing to your 401(k) on a monthly basis.
Another investment option for your retirement would be a Roth IRA. Roth IRAs are individual retirement plans that operate a little differently than 401(k)s.
Unlike a 401(k), money put into a Roth IRA is taxable. The advantage to a Roth IRA is seen when you withdraw your retirement savings as this money is not taxed upon withdrawal. This gives your money the opportunity to grow tax-free in a Roth IRA. One downside to a Roth IRA is that they are a bit restrictive in regards to investment choices as typically you can choose between stocks and bonds or mutual funds.
Self Directed IRAs
Self-directed IRAs are quickly becoming another popular option for retirement investing. Self-directed IRAs are rather different than the previous two options listed above.
Although their name suggests that these accounts are “self-directed” (and many are), it is possible to hire a financial advisor to help with the investment decisions. However, a problem with self-directed IRAs is that whether you hire a financial advisor or not you will still have to go through a self-directed IRA custodian which costs money.
The big advantage to self-directed IRAs is that they give you a wide variety of investment options to choose from. Some of the most popular investment options include real estate, precious metals, and investing in small businesses or LLCs. However, you are not limited to these three choices with a self-directed IRA and you can invest in a virtually endless list of investment options ranging from RV parks, casinos, ATMs, or even shrimp farms. The variety of investment choices that a self-directed IRA can provide you with is unmatched.
While these are not the only retirement investment options available; self-directed IRAs, 401(k)s, and Roth IRAs are some of the most popular options. Each of these options or plans has their own strengths and weaknesses and they operate in different ways. Determining which option best fits your retirement plan and personal situation will help you choose the one that can give you the best chance at reaching your retirement goals.
Louis Mack is an experienced retirement planner and self-proclaimed hippie. When he’s not offering retirement advice, he enjoys hiking, fishing, and almost all other outdoor activities.