Three considerations when choosing your retirement account

1 Types of retirement accounts

There are generally two types of retirement accounts that offer potential tax advantages: workplace accounts and individual retirement accounts (IRAs).

Workplace accounts

Your employer or union may offer you a retirement plan through work. Some common workplace accounts include 401(k)s, 403(b)s, 457s, and SIMPLE plans.

Individual retirement accounts

You may also choose to set up your own IRA account outside of work. IRAs are offered by banks and other financial services companies.

          For illustrative purposes only. May not be reflective of your particular situation. 

Tax benefits

Both workplace and individual accounts can offer you potential tax benefits. Some accounts allow you to contribute pretax dollars, and Roth accounts let you contribute after-tax dollars. Why does it matter when you pay taxes? Your answer and the anticipated tax benefits depend on when you expect your taxes to be higher—now or in retirement.

• If you expect your taxes to be lower in retirement, you may want to consider choosing a pretax account and have your savings taxed later.
• If you think your tax bracket may be lower now, then a Roth account may make more sense.
• If you want to have flexibility and diversify your tax strategies, then you may want to consider having both pretax and Roth accounts.

Individual circumstances will vary and are not reflective of any particular tax rate.

2 Investment options in your retirement plan

Workplace plans and IRAs both offer you investment options from a variety of asset classes and risk profiles. It’s important to figure out and understand which option is best for you. Not everyone is an investment expert, so many plans offer options to help people of all levels of investment knowledge make an appropriate choice. What kind of investor are you? 

Do-it-yourself investor

If you want to select and manage your investments on your own, most retirement plans offer you the freedom to choose the investments you feel are suitable for your situation. As a do it yourselfer, you’ll need to do your own research, choose your own mix of investments, and monitor their performance. Start by considering the:

• Time you have until retirement
• Amount of risk you’re willing to accept
• Other investments you might have outside your plan

Do-it-yourself with a little help investor

If you want to do it yourself but receive a little help, you may want to consider a target-risk or target-date fund because both are professionally managed for you. 

• Target-risk fund—You choose a fund with the level of risk you’re comfortable taking such as conservative, moderate, or aggressive. The fund manager does the work to stick to that level of risk.³
• Target-date fund—You choose a fund based on your expected retirement date. Generally, the fund manager gradually shifts from less conservative to more conservative investments as you get closer to retirement.⁴

Do-it-for-me investor

If you want someone else to do it for you, you can consider partnering with a financial professional or enrolling in a managed account, offered by some retirement plans. Both select and monitor the appropriate investments based on the information you provide them. It’s your responsibility to update your profile when your personal or financial situation or goals change, so your situation can be reflected in your strategy.

For illustrative purposes only. May not be reflective of your particular situation.

3 Managing your investments as you approach retirement 

As you get closer to retirement, you may want to consider a strategy of having more of your investments on the conservative side, and fewer funds with more risk. Consider creating a drawdown strategy to outline how you’ll take out your money in retirement. There are many rules of thumb people use to create a drawdown strategy. But you may also consider consulting with a tax or other financial professional to help you with your strategy.

Understanding the stock market

As you see, you’ve got lots of options when it comes to saving for retirement, and the decisions you make today also have an impact on your future. Whether you save in a plan offered to you at work or on your own, you have decisions to make about contributing before or after tax and how to invest. Learning the basics can help you feel more confident making these important decisions. 

This wraps up our series on stock market investing. If you missed the earlier ones, please check them out:

• The basics of the stock market and why it’s important
• The concepts of asset allocation and diversification
• Answers to six questions about investing in the stock market
• Why the stock market goes up and down and what you can do about it

For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges, and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectuses may only be available in English.  

Neither asset allocation nor diversification guarantees a profit or protects against a loss. There is no guarantee that any investment strategy will achieve its objectives. Past performance does not guarantee future results. 

It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel. 

Income-tax rules on how withdrawals are handled may vary from state to state. In this document, all tax disclosures regarding Roth 401(k) contributions are limited to the federal income-tax code and, in particular, all references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only.