401(k), IRAs, FCM... Which one and how much?

Recently, clients have been asking me for advice on optimizing contributions to retirement accounts.  With all the different retirement accounts available —401(k), 403(b) or 457 plans, traditional IRAs, Roth IRAs, regular brokerage accounts—it can be challenging to know which are best, and in what combination.  It is important to optimize saving for retirement.  Decisions today can make a significant difference in future wealth.

I net out my recommendations below.  However, first, let me share my view of employer-sponsored retirement programs:

401(k), 403(b) or 457 plans

Pros:  Overall, they are beneficial. These programs lower your taxable income.  The auto-investing option instills discipline to save and invest.  And employers who match are giving you free money.

Cons:  Employer-sponsored programs restrictive and costly to the employee.  Many companies have mediocre investment options, and they provide limited information on those options.  Fees are plentiful, yet remain hidden or unclear.  And the opportunity cost for FCM clients is high.  The money you put into your 401(k) remains untouchable (or un-investable by FCM) until you leave.  Clients are rarely eligible for in-service withdrawals unless they reach a certain age or tenure.     

Recommendations

Given my opinions above and FCM's focus, I suggest the following for most working clients*:

1. If you have access to a 401(k), 403 (b) or 457, maximize the employer matching contribution limit.  Fund to the $17,000 annual contribution limit for 2012.  If applicable, add an additional $5,500 catch-up contribution.
2. Add to your traditional IRA or Roth IRA at FCM. The limit is $5,000 for individuals under 50 at the end of 2012. $6,000 is the limit if you are 50 or older.  If applicable, add an additional $1,000 catch-up contribution.
3. If you are self-employed, contribute to your SEP IRA at FCM for additional tax benefits. The maximum dollar allocation in 2012 is $50,000.   This is a great vehicle.  And the tax-deferment on compounding growth makes it advantageous for clients who invest in FCM's Focus 20.  
4. Consider making a nondeductible contribution to a traditional IRA. Tax-deferment on compounding growth benefits those invested in the Focus 20.
5. Invest additional savings into your FCM brokerage account.  It is important to continue adding to your portfolio to optimize growth.  Auto-investing is a good option to ensure discipline.
6. As part of your routine, rollover your 401(k) to FCM after leaving an company/employer.  This allows me to start managing those funds on your behalf.

That is the general action plan.  For more information: contact me, www.IRS.gov, and/or your tax professional.

- Paul

* Disclosure: Information in this post is in no way intended as personalized investment advice and should not be interpreted as such.