Too Many Choices

One of my main reasons for first visiting a financial advisor was to simplify my finances. As usual for someone of my generation, I had worked several jobs and each one offered retirement savings plans, in my case 401(k)s. In addition to that I had several bank accounts and brokerage accounts that I wanted to consolidate. In short I was starting to get confused.

The same sort of thing is happening to all of us as new laws create new ways to save for retirement. The latest means of saving is a Roth 401(k). Just like a regular 401(k) this is administered through your employer but the money you invest is taxed (as opposed to pre-tax money in a traditional 401(k)). When you retire and want to withdraw money from the Roth 401(k) you won't pay any taxes. The traditional 401(k) is taxed upon withdawl.

So now we have the following means to save for retirement: a traditional IRA, a Roth IRA, a 401(k), a Roth 401(k), and, of course, regular taxable investments such as your personal brokerage account. There are more, such as annuities and life insurance, but those are a bit more esoteric so I'll just concentrate on the more well known savings vehicles.

If you could just invest in all of these accounts without a maze of restrictions that would be great but it doesn't work that way. For instance can you put money into both a traditional IRA and a Roth IRA? Yes, as long as the total amount doesn't exceed the mandated limit which for 2006 is $4,000 for those of us under 50 ($5,000 for those over 50). Can you invest in both a traditional 401(k) and a Roth 401(k)? Yes again but the same limit applies that you can't exceed the maximum investment which in 2006 is $15,000 for those of us under 50 ($20,000 if you're over 50). Can everyone invest in a Roth IRA? No, sorry their is an income limit. For single people you can not contribute to a Roth IRA if your income is above $90,000 and married couples can not contribute to a Roth IRA if their income is over $160,000. (Note that there is a phase out that starts at a lower income level but the numbers I gave are the limits above which no contributions may be made.) For those over the limits just given for Roth IRAs there is another penalty, they can't deduct traditional IRA investments from their taxes so there's almost no tax benefit to the IRA, although the growth is not taxed until withdrawl so it's not quite the same as a fully taxable investment account.

So now, in addition to choosing the investments within your retirement savings, you now have to choose which type of plan to use in the first place. Another roadblock for the many people already confused by the prospect of saving for retirement.

Don't get me wrong, options are a good thing most of the time but too many choices starts to become paralyzing. It's like eating at a fine restaurant with maybe 10 items on the menu versus a diner with 10 pages. Whenever I go to a diner I tend to stare at the menu, unsure of what I really want. Now imagine rules that say if you order an item from page 3 then all items on page 2 are excluded. Or if your income is too high then you're excluded from ording all items on page 4. Well that's exactly what all these investment options and their associated rules state.

So do I have any solutions? Well not really. The only thing I would recommend is to do something. Talk to a financial advisor or your company's human resourses department to determine which type of plan is best for you. Then enroll! That's the important part. When it comes down to it, actually investing in a plan is far more important than picking the "right" one.

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