American workers planning for retirement often have a general understanding of the roles 401(k) plans and IRAs (Individual Retirement Accounts) play in the process.
Personal finance author and philanthropist Tony Robbins offers some important advice about each of these retirement savings tools that are well worth considering.
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Generally speaking, employer-sponsored 401(k) plans offer workers matching contributions that encourage them to enroll, so they can take advantage of that free money.
Up to a certain percentage of one’s income, those employer matches are effectively a guaranteed 100% return on a worker’s investment.
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The process of participating in 401(k) plans is often made easy by companies that offer automatic enrollment — and the simple fact that contributions are taken directly from regular paychecks.
Many employers offer the option of contributing to Roth 401(k)s, in which taxes are paid up front and earnings grow tax-free.
Workers make choices from a number of pre-selected mutual funds and other funds that are limited to those available in a particular plan.
Americans are also strongly advised to invest in IRAs. In the case of Traditional IRAs, taxes are deferred until they must be paid when withdrawals are made in retirement.
For Roth IRAs, taxes are paid before contributing, which allows for tax-free withdrawals after one has retired.
More flexibility is provided to people when contributing to IRAs, as there are more investment choices available than with 401(k)s. They allow for stocks, bonds, ETFs and other options.
Robbins has a key message for workers about a few specific advantages they can leverage when using these investment tools in his recommended ways.
Personal finance author and motivational speaker Tony Robbins speaks on Roth IRAs and 401(k)s.
Tony Robbins clarifies his approach to Roth IRAs vs. Traditional IRAs
Robbins explains that, because taxes on contributions to Roth IRAs are paid up front and withdrawals in retirement are made free of taxes, there is one big reason he recommends people ought to invest in Roth IRAs over Traditional IRAs.
Robbins believes that people’s taxes are destined to rise over the long-term. Many expect that, because they are making less of an income in retirement, that would mean they would be paying lower taxes.
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In his book Money: Master the Game, Robbins offers a couple reasons (among others) why that is not an expectation upon which people should rely.
In retirement, people’s homes are often paid off (meaning, for tax purposes, there is no mortgage deduction available).Also, children are grown up and have become taxpayers of their own (so they can no longer be claimed as dependents).
Related: Tony Robbins warns U.S. workers on Social Security, retirement certainty
Tony Robbins has major 401(k) advice
Robbins wants to be sure workers are aware of an option they have when choosing a 401(k) plan in their workplace.
If their employer offers a Roth (401)k, Robbins strongly encourages them to take advantage of it.
For similar reasons as with IRAs, the author believes that a person’s taxes will be higher after they retire. Paying those taxes up front in a Roth 401(k) — at what would be a lower rate — would automatically lead to spending less money on them (than if they were not able to make tax-free withdrawals in retirement).
A Center for Retirement Research report found that 39% of U.S. households are at risk of not having enough money to maintain their current standard of living.
“Reinforcing the notion that roughly half of households are at risk is the fact that only half of working households ages 55-64 have any 401(k)/IRA saving,” the report stated. “Yes, some have defined benefit plans, but most with defined benefit plans also have a 401(k). Moreover, the amounts in 401(k)s/IRAs are quite modest, except for the top quintile of the income distribution.”
Robbins would seem to agree that these warnings are important reasons for Americans to make the smartest decisions possible when choosing investment strategies for retirement.
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