Tuesday, July 22, 2008


If you regularly listen to “The Money Show”– which you should – but, even if you don’t – you probably know that the answer to this basic retirement question: Should I be saving for retirement? is – Yes. However, when it comes to many other basic retirement saving questions, a lot of people are less certain of the answers. So, here’s a quick, True or False, Retirement Quiz (along with the answers) to a number retirement questions you really should know the answer to.

1. True or False: You should only invest in a 401k or 403b plan if your employer matches the amount you invest? The answer: False.

Investing in a 401k, 403b (or any other employer sponsored retirement plan) is one of the best ways to save for retirement. Accordingly, if your employer offers one, save as much as possible in it as you can afford, whether or not your employer matches your contribution. (If your employer does match your contributions, consider the “match” to be ‘icing on the cake’.) Additionally, don’t make the mistake of only contributing an amount equal to the amount your employer matches. Rather, if you can afford it, invest the maximum amount allowed, each year, in your employer sponsored retirement plan.

2. True or False: If you invest the maximum amount allowed in your 401k, 403b or other employer sponsored retirement account, you should not also invest in a Roth IRA?
The answer: False.

Your goal, as we’ve often pointed out, is to – if possible – save 20% of your income (15% if
you’re a teacher, fireman or in another profession that guarantees you a pension when you retire) towards retirement each year. But, in most cases, the maximum amount you can invest in an employer sponsored retirement account each year will be less than 20% of your income. So, if you’re not over the Roth IRA income limit, and you can afford to, by all means, invest in a Roth IRA.

3. Multiple choice: Money invested in which of the following retirement accounts is not tax deductible?
a. 401k
b. 403b

Sorry – trick question: they’re all tax deductible. Money you invest in
a 401k, a 403b and/or a SEP IRA will grow tax deferred,
and is taxed when you with the money (at your then tax rate, and, if withdrawn after age 59 ½, without any penalty).

Money invested in a Roth IRA, however, is not tax deductible. But, so
long as you meet all the conditions that money grows tax free and is withdrawn tax-free.

4. True or False. In many cases, investing in a mutual fund that charges a
load is a good idea.
The answer: True.

As we’ve pointed out before, all things being equal, if you’re choosing between two funds which both perform well and fit well within your portfolio, than you’re better off choosing the no load fund. But, things aren’t always equal. Your biggest concern is with a fund’s long term net return. And, for various reasons (one, very often occurring – example, is the fact that the only “good” mutual fund choices available to many people in their retirement plan are load funds) sometimes, your best long term net return will be from a load fund (or funds). So, in such cases, investing in the mutual fund (or funds) that charges the load is a good idea.

5. True or False. You should always rollover your regular IRA investments
to Roth IRAs.
The answer: False.

In all circumstances, the answer as to whether one should rollover a regular IRA to a Roth IRA will depend on each individual’s situation. However, for most people, doing such a rollover is not a good idea. Why? Basically, two reasons:

– First, the size of the tax bill you’ll have to pay when you do the rollover is usually quite high, and,
– Second, in many cases, all or part of the money needed to pay this tax bill comes from the existing IRA being rolled over. Which means, you’re left with less (very often, a lot less) money growing tax deferred or tax-free towards retirement, which is not a good idea.