Since I’m a former river guide and not a tax attorney or CPA, I’m not going to advise you about how to set up these plans.
I will tell you however, I’m not a huge fan of the 401k programs because most of them force you to invest in mutual funds.
The only time a 401k is better than an IRA is when the company you work for is matching at least 50 percent of the funds you put in there. In that case, take the free money, but put in only the amount they’re going to match. Beyond that point, open up an IRA and max it out, because you can do Rule #1 investing in an IRA that’s self-directed.
Roth IRAs are tax-free forever!
You put the money in after you pay tax on it, and it grows inside the Roth tax-free, and then when you retire and take it out, you never have to pay tax on the gains. I like that one. That’s the one my kids have, because they’re in a very low tax bracket and will be for some time, so it makes a lot of sense to jam as much into a Roth as they can after tax, and then never pay tax on the gains.
Any online brokerage can tell you over the phone how to set one of these up. It’s easy and takes about five minutes. They can also show you how to roll over a 401k that’s no longer being matched by your employer. Some of the plans have a very limited amount you can put in, and are of much more use to people in their twenties than to people in their fifties.
(Your accountant can help you determine which one is best for you, as well as how much you can allocate to it on an annual basis.)
But plans like a SIMPLE IRA are excellent—you can pack away a huge amount every year tax-free if you qualify.
The key thing is to get the money into a tax-deferred or tax-free account.
P.S. YOU DON’T GET WHAT YOU PAY FOR
Your 401(k) fund managers and administrators are charging you, on average, 25 percent per year of your expected Return on Investment. And they take that money whether they made you any money or not.
In 2008, they took about $100 billion in fees and commissions while lowering the value of your retirement account by over 40 percent.
And if you think that’s bad, consider this:
What they take when they rip you off for 25 percent of your gain is far more than 25 percent. Over your investing life, that 25 percent fee off the top robs you of 60 to 70 percent of your expected gain by the time you reach retirement … and continues to rob you thereafter.
I repeat: 60 percent of what you should have gotten from your investments is gone by the time you are sixty-five, taken by fund managers and fund administrators.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.