How to Split Up Retirement Accounts

When it comes to saving for retirement, you don't have to put all your eggs in one basket. Once you assess how much you can contribute to your overall retirement portfolio, set up a variety of retirement accounts. This enhances your retirement savings by creating a diversified plan to grow and protect your money. Use the tips below to prioritize your contributions for maximum benefit.

Instructions

1. Contribute as much as possible to your 401(k) plan at work, especially if your employer matches your contributions. Even if he only matches a percentage of your contribution, it is still like getting free money. If there is no employer match, investing in a 401(k) is still hard to beat because the money you invest is "before tax" money. The funds you invest and the earnings you accrue are tax deferred until you make withdrawals in retirement.

2. Set up either a traditional IRA or a Roth IRA. Your contributions to a traditional IRA may be tax deductible, but you will pay taxes on your withdrawals in retirement. With the Roth, you may not deduct your contributions, but you may withdraw your funds in retirement tax free. You can open an IRA in addition to contributing to your 401(k) at work. Be aware that there are contribution and income limitations on IRAs. See Additional Resources below for more information.

3. Consider investing in annuities if you still have money to save for retirement after contributing to your 401(k) and your IRA. An annuity is an insurance product in which you invest a sum of money, and after a specified amount of time you begin to receive regular payouts based on the value of the annuity at maturity. Like the earnings on a traditional IRA, the earnings on a tax-deferred annuity are taxed when you start making withdrawals. Annuities can be complicated investment options with many rules and expenses. Be cautious and ask a lot of questions before making annuity investments. Variable rate annuities are rarely appropriate for individuals close to retirement.

4. Realize that your retirement accounts can be volatile and may fluctuate in value according to what you place inside your investments. If you are risk averse and close to retirement, use a higher percentage of products like CDs, bonds and money market funds. If you have a long time horizon in which to invest, place a higher percentage of more risky investments like stocks into your retirement accounts.

Tips & Warnings

• Understand the surrender charges for early withdrawals from an annuity. They can be as high as 7 percent of the value of your investment. Annuities are not bank products and are not FDIC insured. If the insurance company that sells you the annuity goes bankrupt, you could lose your entire investment.

Resources

• IRA information
• Annuities explained