One of the unfortunate casualties of the recent economic downturn is distrust in the stock market and investments tied to it. That includes IRAs, Roth IRAs and 401(k) plans.

But market-related investments are intended for the long term, of course, and consumers need to stay the course when it comes to retirement investing. That is among the best advice you can give clients this year. Especially since the market has largely corrected itself and most stocks have recovered their lost value.

“It has certainly been hard for people to watch their balances go down, although the last year-and-a-half the market has been stronger, so they’ve seen a lot of recovery too,” said Lea Ann Knight, a certified financial planner at Garrison Knight in Bedford, Mass. “I think it was human nature that many people stopped contributing, which was really a mistake. Psychologically, they would be contributing, and watching it go down; contributing, and watching it go down. So they were like; ‘Why am I throwing good money after bad?’” she said.

“Obviously with my clients I tried to discourage that. So those people who continued the regular contributions have a lot more money than those who didn’t during the last four years,” Knight said, adding that they also have a better nest egg for retirement, since many people are now playing catch-up.

Whether your clients are playing catch-up, continuing an in-place retirement strategy, or starting the process anew, this is a good time for them to invest. And it makes your role as retirement planner all the more important. Investment choices can get complex, and they have different payout formulas, tax rates and withdrawal penalties. 

Roth IRAs and 401(k) plans continue to be among the most popular investment options, so you should start there, according to experts. Explain how a Roth IRA works as a tax-deferred account that is available to them up to certain income levels. If your client is under 50 they can put in up to $5,500 per year into a Roth IRA. If they are over age 50 they can take advantage of a catch-up provision that allows for up to $6,500 per year, Knight said.

Your client should understand the difference between a Roth IRA, which is essentially growing tax-free, and a traditional IRA, which enables them to take a deduction for putting money into the account, but they pay taxes on the account when they take the money out in retirement, according to Knight. Your client should also understand that employer-sponsored 401(k) contributions are treated much like a traditional IRA. An individual can contribute money and take a tax deduction in the year they contribute, and the account grows tax-deferred like an IRA. But again, they will pay taxes on the account in retirement.

Penalties Recent times have certainly been tough on many individuals and couples. Your clients may be tempted to want to cash a Roth IRA in early. Your best advice here is on the key age factor of 59 ½, the point at which your client can draw on a Roth IRA without penalty.

“The nice thing about a Roth: not only does it grow tax free, but unlike the traditional IRA or the 401(k) – where you have to start making the minimum distributions at 70 ½ — the Roth does not have that requirement. You could really leave that money there throughout your lifetime if you didn’t need it. It would continue to grow,” Knight said.

Clients may also be tempted to cash out a 401(k) plan in tight times. But again, tell them to wait until 59½, according to Ray Mignone, a certified financial planner and CEO of Ray Mignone Associates in Little Neck, NY. At that point your client can withdraw without penalty, other than the tax they pay. Some employers will also allow individuals to borrow against a 401(k) account.

“As a financial planner I don’t recommend that because you’re borrowing against your own retirement, and most people haven’t saved enough for retirement to begin with,” Knight explains.

Should you advise your client on one plan over the other? Ideally, recommend both, the experts said. The obvious immediate benefit of a 401(k) plan can be matching contributions from an employer, Mignone said. That’s free money. And the younger your client is, typically the more sense a Roth IRA makes — it has longer to grow tax free.

There are also limits to 401(k) plans — currently $17,500 if you’re under age 50; and $23,000 if you’re over age 50. But again, if your client’s employer offers a matching policy, they should be putting in at least enough to receive the matching contributions.

If your client is playing catch-up, the 401(k) plan should be your immediate advice. Remember, the Roth IRA has a maximum contribution of $5,500, whereas the 401(k) plan allows up to $17,500.

“To play catch-up your client probably should be doing both,” Knight said. “And there’s nothing that prevents you from doing both, if you’re under the Roth income limit. What I like to see when clients are retiring is that they have several different buckets to draw from—ideally tax deferred buckets; and tax free buckets like the Roth; and even some after-tax buckets; so they can manage their tax situation year to year, figuring out where to take the cash from each bucket,” she said.

So what are the biggest mistakes that your client can make in all this? There are a few: waiting too long to act; cashing out an account too early; and stopping contributions at any time before retirement.

“Certainly the obvious thing they can do wrong is to stop contributing, especially worrying about the markets,” Knight said. “Whatever is happening in the market today isn’t going to make a huge difference to your long-term plan. Also, being too conservative in a 401(k). The best thing is to have a well-diversified approach, where you’re got a little bit of everything in different amounts, so that you can weather all types of market cycles.”

Assuming your client has done all the right things before retirement, including opening a Roth IRA account and contributing to a 401(k) plan, how should you advise them at actual retirement age?

“A few things can happen,” Knight said. “When somebody retires, I would strongly recommend that they consolidate and roll their plans to a traditional IRA. This will allow them a lot more flexibility around investments as they get older. Having things in one place is going to make it a lot easier to manage.”

There are many fees associated with 401(k) plans, and it is difficult to continue contributing to that account past retirement. A traditional IRA, on the other hand, will continue to grow, and your client doesn’t have to collect on the account until age 70 ½, she said.

“I think people are worried about spending down their after-tax assets,” Knight said. “Those are usually the first ones you should spend down in retirement. You want to think about your beneficiary designations and how they impact your estate planning. You also want to figure out how Social Security plans into your cash flow. It may sense to delay Social Security and draw on your other assets first. You can wait to age 70 and have a richer benefit that at age 62 or 66. It’s really a critical point to do this right.”