Should You Use Multiple Accounts For Retirement Saving?
Retirement planning should be a multi-faceted approach that includes more than just saving money into one account. Why should you consider using multiple retirement accounts and how can you do so? Here's what you need to know.
Why Use Multiple Accounts?
Most people think about retirement planning as one single objective. But you have many choices as to the way you put that money away and its effects both now and in the future.
For example, some accounts offer a tax break in the year you contribute to them. However, you pay taxes when you withdraw in retirement. This can be good if you expect to have a lower tax rate in the future. Other accounts, though, offer no break now but are withdrawn tax-free.
When you focus only on one method of saving and planning, you can't take advantage of all the strengths and mitigate the weaknesses of each account type. You put all your retirement eggs in one basket, so to speak. You also limit the amount you can contribute, even if you can afford to put away more.
How Can You Use Multiple Accounts?
Always keep in mind that you can have more than one account or type of account open at one time. If you're covered by a company 401(k), for instance, you can also usually open an individual IRA and put more money in that. If you go to work for a government employer during your career, you can also open a 457(b) account. This account offers different contribution rules, especially just before retirement age.
Within IRA accounts, as well, you can opt for either a traditional IRA — which is deducted from taxable income in the current year — or a Roth IRA, which offers tax-free withdrawals. Entrepreneurs often have access to unique retirement accounts with different contribution structures or higher limits, including SEP IRAs, SIMPLE plans, and Individual 401(k) plans.
What Are the Downsides of Multiple Accounts?
Owning multiple retirement accounts has one risky drawback: you can forget about them. If you fail to keep track of old 401(k) plans or IRAs, for example, you may lose some of your money over time. Another drawback is that total contribution limits may apply across multiple accounts of the same type. And finally, retirement planning will be more complicated when you have to factor in many plans.
Where Should You Start?
Want to know more about integrating more types of accounts into your retirement planning? Contact a retirement financial planner. Your future self will thank you.
