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Denver Retirement Planning Decisions: IRA vs Roth IRA vs 401K

You’ve probably heard it before - when it comes to retirement, save early and often. However, some people put off retirement investment planning simply because they’re not sure what to do with their money. People often wonder what’s the best type of account, and how best to maximize returns.

The sooner you educate yourself, the sooner you can start planning for the future you want. Here’s everything you need to know about 401(k)s, IRAs and other retirement planning decisions.

Investment Planning 101

Investment planning is a core part of your greater financial and retirement plan. Smart investment planning takes into account your lifestyle, your vision for retirement, and your financial objectives, then leverages your financial resources to meet your goals.

A financial advisor will help you consider the following when it comes to creating your retirement investment plan:

  • Purpose - What are your goals for the money?
  • Resources - How much do you have to invest?
  • Time frame - When will you need to start using the money?
  • Risk level - How much risk are you willing to take?
  • Type of investments - This is often a combination of investments, retirement accounts, savings, and other assets.

Types of Investment Accounts: IRA vs 401(k)

Depending on your situation, you might have a 401(k), IRA, or both to deposit funds into for retirement. There are many differences between these two types of retirement accounts, but the main one is that 401(k) is an employer-sponsored and IRAs are not.

A 401(k) set up by your employer lets you defer a portion of pre-tax income to the plan with each paycheck. Some employers will offer to match your contributed funds up to a certain percentage of your income.

Things to consider when planning for retirement:

  • If you have a 401(k), first contribute enough to earn the maximum funds match from your employer
  • Next, contribute the maximum amount allowed to your traditional and/or Roth IRA
  • Then, return your focus to the 401(k) until you’ve maxed out your contribution
  • If you don’t have access to a 401(k), focus on your IRA(s)

Rolling Over Old 401(k)s

When it’s time to rollover a 401(k) from an old job, you have some options. A financial advisor such as a Certified Financial Planner (CFP®) will evaluate your specific situation, but for many people, the best option is to rollover the 401(k) into an IRA. By doing this, you could benefit from lower account fees and a greater investment selection, while still seeing nice returns.

Things to consider when rolling over your IRA:

  • Do you want a Roth or traditional IRA? For Roth IRA, you must meet income eligibility requirements.
  • Who will be your account provider (do you want to manage funds yourself or have someone do it)?
  • How do you want to invest the money? Funds will be deposited to your IRA as cash, so you’ll need to choose an index fund or other types of investment.
  • Make sure you ask for a “direct rollover” to ensure the funds go straight into your new IRA, not to you personally or you risk being taxed.

Roth vs Traditional IRA

Once you’ve decided that an IRA will be a part of your investment plans for retirement, the next question is - should you open a Roth or a Traditional IRA? The biggest difference between the two is when you pay taxes on the contributions - now or later.

  • Traditional IRA contributions are tax-deductible in the year they are made; you’ll pay taxes on withdrawals when you withdraw them
  • Roth IRA contributions are not tax-deductible, but you don’t pay taxes on withdrawals in retirement

So, the best IRA for you depends on one major question: Do you anticipate your tax rate being higher now or when you retire?

Maximize Catch-up Contributions for Your 401(k) and IRA

Catch-up contributions are a great tool for anyone planning for retirement in Denver and beyond. Catch-up contributions are essentially a higher contribution limit for both IRAs and 401Ks for individuals over 50. Higher limits let you maximize contributions and build a bigger nest egg as you get closer to retirement age.

  • For the tax year 2019, you can contribute up to $6,000 to your IRA, or $7,000 if you’re 50 or older
  • The 2019 annual contribution limit for 401(k)s is $19,000, or $25,000 if you’re over 50

If possible, you should contribute the maximum to your IRAs each year, and take full advantage of catch-up contributions until you reach retirement.

Retirement Planning Benefits for Colorado Residents

Planning for retirement in Denver or other parts of Colorado? You’re in luck. The state of Colorado has some attractive provisions in place for retirement tax planning:

  • Colorado’s income tax system lets retirees take a relatively large deduction on all retirement income
  • Property taxes in Colorado are among the lowest in the U.S.
  • Groceries and medicine are sales tax-exempt

Ultimately, this means more money in your pocket and in your retirement investment account.

Retiring in Denver can be a beautiful thing. With some of the country’s best outdoor recreation, food, and craft beer, it won’t be hard to fill your days. With the right retirement plan in place you can spend less time worrying, and more time in the mountains.

Don’t let unexpected retirement expenses catch you by surprise. Get prepared with The 2020 Guide to Retiring in Denver

2020 Denver Retirement Guide

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