Worried About Retirement? Supplement Your Savings with These Underutilized Options

Many Americans are worried that they won't save enough money to support their retirement goals. If you participate in an employer-sponsored plan—a 401(k) or a 403(b)—you've made a great start toward building your proverbial nest egg.

But if you've maxed out your contributions to your employer plan or you simply want another savings option, consider opening a Traditional or Roth IRA. Participation in these accounts is completely voluntary, but with an opportunity to take advantage of additional tax-deferred or potentially tax-free income, it's a choice you may want to make.

Traditional IRAs
In 2008, individuals can contribute up to $5,000 (plus an extra $1,000 catch-up contribution if you're over age 50) to a Traditional IRA. Experts estimate that Americans need to have enough money saved to replace about 80 percent of their income in retirement. A Traditional IRA is a great way to add to the assets already growing in your employer-sponsored plan. A Traditional IRA also allows you to take advantage of:

• Tax-deferred growth: This much-touted benefit means you don't pay taxes on the assets growing in your account until the day you start taking distributions. What's more, some individuals may be able to deduct contributions to the account from their annual tax returns.¹
• Investment flexibility: Investing in a mixture of stocks, bonds, and mutual funds can help diversify your retirement portfolio, which helps reduce your risk and potentially increase your returns. A financial professional can help you determine the appropriate investments for you.
• Consolidation opportunities: If you have assets in former employer plans and other IRAs, you can generally consolidate them in one account, which cuts down on annual fees paid to custodians, as well as reduces the number of accounts to keep track of.

Roth IRAs
The Roth IRA is another vehicle you can use to supplement retirement savings. Just like the Traditional IRA, individuals can contribute up to $5,000 (plus an extra $1,000 catch-up contribution if you're over age 50) to a Roth IRA in 2008. The Roth IRA also offers the same investment flexibility and consolidation opportunities as the Traditional IRA, with one major difference:

• Tax-free growth: Unlike with the Traditional IRA, where you pay taxes on any earnings when you take a distribution, earnings in a Roth IRA may be distributed tax-free if certain qualifications are met.² This means that you pay taxes now, and potentially don't have to pay taxes on distributions taken in retirement, which keeps your taxable income lower. This is a definite benefit for those who believe tax rates will rise in the future.

Case study: what a difference tax-deferral can make
Let's take a quick look at an individual who:

• Has 20 years to save for retirement
• Makes a $5,000 annual contribution to a Roth or a Traditional IRA
• Receives an estimated rate of return of 8 percent

After 20 years of savings, and assuming the above rate of return, the Roth/Traditional IRA will have grown to approximately $247,000. If this same amount were invested in a regular savings account, earning the same growth rate, the savings would be $146,000. The difference in the amounts is due to the advantages of a tax-deferred or tax-free vehicle, as compared with one where taxes are due on growth annually.

Eligibility and tax advantages in Traditional and Roth IRAs vary on an individual basis. Our goal is to help educate investors about alternative and/or underutilized savings vehicles and strategies. Let us help you explore ways to maximize your retirement savings, to help ensure that you stay on track to meet your goals.

Commonwealth Financial Network does not provide tax or legal advice.

1. See IRS Publication 590 for Traditional IRA deductibility limits.
2. See IRS Publication 590 for Roth IRA qualified distribution requirements.