Saving for Retirement – Which account do I invest in?

Does your employer offer a 401k or a 401b?  If not do you invest in a Roth IRA?  Do these retirement accounts offer different funds to invest which seem complex and overwhelming to the point that you’re not sure what to do?  Let’s simplify these retirement accounts starting with the most common, a 401k and a 403b, then we will discuss a Roth IRA.

A 401k and 403b are very similar retirement accounts with the only main difference residing in the type of company or institution offering the retirement plan.  For example, for-profit companies offer 401k’s and nonprofit institutions offer 403b plans.  Both of these plans have the option of pre-tax (tax-deferred) meaning you deposit money into your 401k or 403b from your paycheck before taxes are taken out.  This allows more money to grow over time and you pay taxes only when you take out or withdraw money from your account.  There is also a Roth 401k or Roth 403b an alternative option, some companies offer which allows you to pay taxes up front and withdraw from your account tax-free when you take money out of your account.  The decision is completely subjective depending on whether you believe your tax bracket will be lower when you retire (then use a traditional pre-tax 401k/403b) or believe your tax bracket will be higher when you retire (then use a Roth 401k/403b).  Please remember there is no clear-cut answer of which is best so go with whatever you prefer.  See a simplified table below looking at the difference in tax advantages for a traditional 401k/403b compared to a Roth 401k/403b.  Also, important to note in 2016, if you are under 50 years old, you can contribute a maximum of $18,000.  If you’re 50 or older, you can make an additional catch-up contribution of as much as $6,000, for a total of up to $24,000.

Tax advantages

For those who do not have the option to invest in a 401k/403b, then you should invest in a Retirement Roth IRA.  Unfortunately, compared to a 401k/403b you cannot contribute nearly as much, per year, only $5,500 for a Roth IRA (Individual Retirement Account).  Should that discourage you?  Absolutely not, remember the power of compound interest.  I suggest you do everything in your power to maximize your contributions and deposit $5,500 every year so you receive the full benefit of compound interest within a Roth IRA.

One major benefit of a Roth IRA, that is not obvious, is the ability to create an emergency fund.  For example, if you get into an emergency situation where you are tight for cash, you can withdraw your principal (what you contributed out-of-pocket) from Roth IRA without a penalty.  Although not encouraged to take any money out of your retirement accounts this could come in handy if a crisis occurs where you need money fast.  Another benefit is withdrawing up to $10,000 for a first time home buyer mortgage, where the $10,000 can include gains from your investments, without incurring any penalties!  This is a nice advantage if you need extra cash for a down payment.

Now that we know what type of accounts are out there, let’s understand what type of funds to invest in.  First let’s talk about fee’s, each investment fund in a retirement account usually has fees (up to 17 different fees can be tallied onto a fund, for active management, e.g. admin fees, investment fees, service fees, and transaction fees, to name a few).  These fees are sometimes hidden so make sure you look carefully when reviewing the different funds in your account.  It is critical to invest in funds with the lowest fee’s possible.  If there are funds available to you that are very similar you should pick the one with the lower fees especially if they have similar average returns.  For example, according to for each 1% you cut in fees an average of 10 years’ worth of money is added to your retirement.  You should try and find fees below 1%, ideally below 0.75%.  You can find low fee funds in index funds which replicate the performance of the market, like the SP500.  Take a look at the chart below from  This chart shows how critical fees can play on the future value of your investments.


To learn if you are paying too much in fees leverage a website like which analyzes your investment account for you and makes recommendations on whether you are paying too much money in fees.  They will also suggest the proper allocation for your investment account based on your age and risk tolerance.  The old rule of thumb is to take 100 subtracted by your age and that is the percentage you should invest in equities (stocks), with your age being the percentage that should be allocated to fixed income like bonds.  The equation is 100 – Age = % of Allocations in Equities or Stocks, where Age = % allocated to fix income or bonds.  Some examples of equities funds are large cap growth equity, large cap value, small/mid cap, and international equity.  I would recommend diversifying across all equity accounts, allocating more to large cap growth and value funds due to their consistency (which contain blue chip stocks that are secure and consistent, producing strong conservative returns over the many years) then allocate the remaining percentages of equity to the other equity funds.  You can leverage that ask you a series of questions based off your risks levels and age to suggest a proper allocation at


  1. Traditional 401k/403b:
    1. Tax Advantages = When you contribute
    2. When You Pay Taxes = Later (when you withdraw)
    3. Max contribution per year = $18,000
  2. Roth 401k/403b:
    1. Tax Advantages = When you withdraw
    2. When You Pay Taxes = Now (when you contribute)
    3. Max contribution per year = $18,000
  3. Roth IRA – alternative to 401k/403b
    1. Tax Advantages = When you withdraw
    2. When You Pay Taxes = Now (when you contribute)
    3. Max contribution per year = $5,500
    4. Other Advantages
      1. Withdraw principal (what has been contributed) without any penalties.
      2. Withdraw up to $10,000 (gains included) towards first time home buyer mortgage.
  4. When selecting funds, select funds with the LOWEST FEES!
  5. Diversify your portfolio. Leverage a site like or to help find the right allocation for you.
  6. Old rule of thumb (that doesn’t mean you have to follow it): 100 – Age = % allocated in equities.  Age = % allocated in fixed income (bonds).

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