So Many Retirement Options, So Few Retirement Dollars

Making the Most of Saving Incentives …While They Last

(RIVERWOODS, ILL., January 27, 2003) – While there are now more retirement plan choices and more incentives to spur individuals to save a little extra for retirement, trying to figure out which to use when you have more options than money can be mind-boggling, according to CCH INCORPORATED (CCH), a leading provider of tax and pension law information. The main options most individuals have are contributing to employer-sponsored plans, such as 401(k) plans, funding a traditional IRA or funding a Roth IRA. Each of these comes with different options and restrictions. Additional catch-up contributions also may be made to most plans by those age 50 and older. For 2003, the catch-up contribution allowed for an IRA is $500; for 401(k) plans, it’s $2,000. Individuals have until April 15, 2003 to make a contribution to an IRA, and the $500 catch-up contribution also applies to 2002 IRAs.

"Retirement options have become a lot more complex compared to the basic employer-funded pension plans employees of previous generations relied on, and employees now have to be much more active participants in planning for their retirement," said CCH Pension Analyst Nicholas Kaster, JD, author of Saving for the Future: Roth and Traditional IRAs.

So how do the different options compare? Below, CCH provides an overview.

Source: Saving for the Future: Roth and Traditional IRAs,
2002, CCH INCORPORATED

Assuming the income criteria are met, one of the most difficult decisions for investors is deciding whether to take a deduction now and pay ordinary income taxes later – in which case they’d opt for a traditional IRA; or forego deductions now in return for receiving tax-free distributions later – in which case they’d opt for the Roth IRA. However, unlike a traditional IRA, Roth IRAs do not require any distributions be taken. Therefore, they can be a powerful estate planning tool for individuals who don’t need the money in retirement and whose top priority is to extend tax deferral.

"A grandmother could leave a Roth IRA to a young grandson. The child would be required to take distributions over his life, but because his life expectancy is quite long, the distributions would be small and the money within the Roth IRA would continue to grow tax-deferred," said Kaster.

While trying to choose between a traditional deductible IRA and a Roth IRA can be difficult, it’s almost always an easier choice to decide on funding a Roth IRA over a traditional nondeductible IRA.

"With both types of IRAs, individuals are investing after-tax dollars, so there’s no up-front tax benefit," said Kaster. "However, distributions from Roth IRAs can be taken entirely tax-free, whereas distributions from nondeductible IRAs consist partly of nontaxable contributions and partly of taxable earnings."

Another choice facing many employees is whether to invest their retirement dollars into employer-sponsored plans, such as 401(k) plans – or their counterpart 403(b) plans for employees of tax-exempt organizations and 457 programs for government workers – or into an IRA.

Under tax law restrictions, all except lower-income employees who participate in qualified plans are precluded from making deductible IRA contributions. However, Roth IRAs aren’t subject to these active participation rules. Therefore, an individual could decide to fund both a Roth IRA and a 401(k) plan. Those with limited funds need to decide which is best.

"401(k) plans have two major advantages: They permit larger contributions and employers often match a portion of the investment, which means the employee is able to fund part of their retirement with employer-provided dollars that wouldn’t be available through a Roth IRA," said Glenn Sulzer, JD, a senior CCH pension law analyst specializing in 401(k) plans. "So, it’s generally a sound strategy to first contribute to a 401(k) plan, at least up to the highest amount that an employer will match, before making a contribution to a Roth IRA."

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com. The CCH human resources web site can be accessed at hr.cch.com. The CCH tax and accounting destination site can be accessed at tax.cchgroup.com.

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