Strategies for Account Selection

During the earlier years of their careers, many investors are strapped for funds. They’re often juggling mortgage payments, saving for children’s education, and saving for their own retirement. But as they get closer to retirement, particularly when the kids have moved out, they have additional funds available for retirement saving. Many of these investors can then afford to fully fund their 401(k) plans–at least to the full match–and still have additional savings funds available.

That raises the question: What type of account should they use to maximize the return on their savings? Depending on their situation, they may face a choice between options that generate current deductions with tax-deferral (traditional IRAs, for example), no current deduction but tax-free growth (Roth IRAs), or tax-deferred accounts, such as annuities.

Vanguard’s Investment Counseling & Research Division recently published a paper, “Investing for Retirement: Strategies for Taxable Investors,” which discusses the account-selection process. The report notes that investors and advisors should consider multiple factors when deciding where to invest their retirement savings.

Fran Kinniry, a principal with Vanguard’s Investment Strategy Group, says the first basic decision is to take full advantage of any employer savings-match to the fullest extent. Once that account is funded, a key factor is the anticipated income tax rate in retirement. “It gets down to that tax consideration of where you are today versus the future,” he says. “If you’re going to be in the same tax bracket today as the future, the location of the savings really doesn’t matter all that much.”

The report provides guidelines for the basic tax-related decisions: