Ask An Advisor: Retirement Plan Alternatives

Detail of "Autumn scene at Woodleigh" by Thomas Tolkien via Wikimedia Commons used under Creative Commons Attribution 2.0 Generic license.

Dear Abigail,

I am a non-traditional student.  I am not employed full-time, I only work on campus during regular semesters and summer sessions.  I will be attending graduate school next fall, and will be working as a research assistant.  I don’t foresee being employed with the option of a 401K plan or other benefits for a number of years.  Since I am 28 and now far more concerned about retirement plans than I was at 23, are there any options for individual savings/investment retirement plans?  If so, how costly are they?  What alternatives might there be to a company sponsored 401K plan?

– Seminar Attendee

Dear Seminar Attendee,

I’m going to assume that you’ve already got your financial house in order; that your documents are organized, you have control over your budget, you have your debt mostly paid down or well in hand, that you have a reasonably adequate emergency fund, and that you have a reasonable expectation of sufficient future income.  The reason I’m going to assume all this is that these are all (usually!) prerequisites to saving for retirement.

Now that we’ve assumed all this, what can we do about getting you an individual retirement plan?

First, there are a few important things to understand about owning your own retirement plan.  First, the institution you have your retirement plan held at is very important.  It’s like having a checking account – you can open a checking account at many different banks or credit unions.  You can have more than one checking account.  The rules governing how checking accounts work are consistent across banks, but there are different fees at different banks, and so on.  So it is with retirement accounts.

Since the institution you open your retirement account at will determine the kind and number of investments available to you, as well as the fees and service associated with the account, you will want to think about where you will open your account before you decide to open your account.  Here are some techniques I suggest for shopping around:

  1. Does the institution offer the investments you want to invest in?  If you open your retirement account at a bank, they may only offer CDs.  If you open your directly at a mutual fund family, you will only have their funds to invest in.  If you open your account at a discount brokerage, you are likely to have a huge spectrum of funds to invest in.  Once you know what securities you want to invest in, then you can use that to determine which firms might carry what you want.
  2. What level of service do you need and can you afford?  There are all kinds of professionals who are willing to help you invest.  They range from commission stock brokers who call themselves financial advisors, to insurance salesmen who call themselves financial advisors, to bank product salesmen who call themselves financial advisors, to people who actually provide financial advice and call themselves financial advisors, and beyond.  All of these people need to be paid for their work, and they may be paid by commission or by fees.  Of course, you could choose to do it yourself, which is fine, too.
  3. Compare fees and charges for each institution.  This will include things like account fees, trading fees, commissions, and advisory fees.  The spectrum of cost is very wide – some providers are very costly and some are incredibly inexpensive.

Once you’ve decided where you will want to open your account, then you have to tell them what kind of account you want to open.  I’m going to concentrate on two kinds of common individual retirement accounts: IRAs and Roth IRAs.

The best way I know how to explain the difference between the two is from the point of view of taxes. What’s important to remember is that the IRS will tax your retirement money.  You have a choice: do you want to pay income taxes now or when you retire?  With the Roth IRA, you choose to pay taxes on the money before you put it into your Roth IRA account.  When you retire, you get to take that money out and use it tax-free.  With the IRA on the other hand, you get to avoid paying income tax on the money now, but you pay income tax on the money you take out for retirement.  Generally, the Roth IRA is preferable, but you’ll want to talk to your tax preparer or financial planner for specific advice.

If you don’t have a financial planner, you can use the CERTIFIED FINANCIAL PLANNER™ Professional search tool from the Certified Financial Planner Board of Standards Inc. or the Planner Search tool from the Financial Planning Association.  Both websites have helpful information about finding financial planners, so spend some time there learning about how to choose a financial planner and narrowing down your criteria.

Take your time and make sure you understand exactly what your advisor is going to do with your money, and good luck!

– Abigail

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