MONEY Ask the Expert

Do I Owe Taxes on a Windfall from a Retirement Plan?

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Robert A. Di Ieso, Jr.

Q: I am the beneficiary of a $15,800 death benefit from my dad’s pension plan. I was under the assumption that I would not be taxed on it, but is that the case? I want to make sure I deduct any taxes before I distribute the money to my siblings. —Tanya, White Plains, N.Y.

A: The answer depends on the source of the death benefit. If the payout is in the form of a life insurance policy—what your case sounds like—you won’t owe any taxes on the $15,800.

But the tax consequences would be different if you had inherited a tax-deferred retirement plan, such as a 401(k), says Charlotte, N.C. financial planner Cheryl J. Sherrard. The money in that kind of plan is taxed only when the owner makes a withdrawal. As an heir, you would owe income taxes on any distributions.

When you inherit a retirement account, you have few payout options. You can take the full amount in a lump sum, which could push you into a higher tax bracket if the windfall is significant. If you do that, you can request federal and state tax withholding when you fill out the distribution paperwork. Or you can ask for the full amount and pay the taxes later.

To spread the distributions over several years, you can open what’s called an inherited IRA and then move the retirement plan assets into this new account (assuming the qualified retirement plan allows you to). You generally have to start taking annual distributions no later than Dec. 31 following the year of the original account holder’s death. Since the rules are tricky, talk to a tax professional, advises Sherrard.

In this case you would either be gifting a small amount to your siblings yearly, or the full amount all at once. But keep in mind that as a sole beneficiary you are not required to give any money to them.

And no matter what, don’t rush to share your inheritance until you have the full picture of what your father left behind.

“You may want to wait until any other assets of your father’s have been split among all siblings, and then if you desire to equalize with them, you can do so via that net retirement money,” says Sherrard. “This is a common gotcha when one child inherits a taxable asset and then needs to take taxes into consideration before splitting it up.”

Have a question about your finances? Send it to asktheexpert@moneymail.com.

 

TIME Northern Ireland

Sinn Fein Leader Gerry Adams Freed from Police Custody

BRITAIN-NIRELAND-POLITICS-MURDER
Republican party Sinn Fein leader Gerry Adams, left, next to Sinn Fein politician and Deputy First Minister of Northern Ireland Martin McGuinness, talks to the media during a press conference at a hotel in Belfast, Northern Ireland, on May 4, 2014 following his release from Antrim police station where he was detained for questioning over a 1972 murder. Peter Muhly—AFP/Getty Images

The 65-year-old Irish republican politician was released without charge Sunday, after being arrested Wednesday on suspicion of ordering a 1972 killing while serving as the Belfast commander in the Irish Republican Army

Updated 4:13 pm E.T.

Sinn Fein leader Gerry Adams was released without charges from police on Sunday after spending five days in custody.

Earlier in the day, the Associated Press, citing an anonymous police source, reported that the 65-year-old Irish republican politician would not face charges over a 1972 killing, but that police would send prosecutors a file of potential evidence against him.

Adams’ release was delayed by two hours due to angry loyalist protestors, who attempted to physically block his release until police officers, many of whom were clad in riot-proof gear, escorted Adams out of the building through an alternate exit.

Adams was arrested on Wednesday following allegations that he ordered the 1972 killing of a mother of 10 while serving as the Belfast commander in the Irish Republican Army. He has denied the accusations.

Adams’ detention period was due to expire Sunday. Police would have had to charge him or seek permission from a judge to extend his time in custody, as they did Friday.

According to the BBC, Sinn Fein politician and Northern Ireland deputy First Minister Martin McGuinness said his party may no longer be able to support the Police Service of Northern Ireland following Adams’ time in custody.

In response, Northern Ireland First Minister Peter Robinson, leader of the Democratic Unionist Party, accused Sinn Fein of trying to blackmail the police with “republican bullyboy tactics.”

[AP]

MONEY Ask the Expert

No 401(k)? You’ve Got Options

Q: The company I work for does not offer a 401(k), and as a young professional I want to start a retirement plan. What is the best option for me? I don’t have a large amount of money to contribute, but would obviously like to maximize my investment. — Elizabeth, Herndon, Va.

A: As one of the millions of workers who does not have access to a workplace 401(k) — or the added perk of an employer match — the responsibility for saving for retirement rests squarely on your shoulders.

The good news is that you have several options. And the earlier you start, the longer your savings has to grow. Even small sums set aside now can grow into significant savings

For example, let’s say you invest only $100 a month for the next 40 years. With an average annual return of 6%, that modest monthly contribution would grow into nearly $200,000 in four decades.

“So just getting in that habit can really set the stage for a solid financial picture.” said Sophia Bera, a Minneapolis-based certified financial planner who specializes in working with Millennial clients across the country.

Just be sure you have at least three to six months of easily accessible savings set aside for an emergency before you start investing. Once you do, here are a few options to consider that can help you get more bang for your buck:

Traditional IRA: Opening a traditional Individual Retirement Account allows you to invest your savings while realizing some sizable tax breaks.

Under federal tax rules, you can contribute up to $5,500 a year to an IRA. If you’re single and don’t have a workplace plan, you can deduct your entire IRA contribution, which could result in more than $1,000 in tax savings.

Related: 401(k) vs. Roth 401(k): Which one’s right for you?

Instead of paying the taxes now, you’ll pay them when you withdraw your money during retirement. That’s great — as long as you don’t expect to be in a higher tax bracket when you retire. If you think you will be, a traditional IRA may not be the best choice, Bera said.

IRAs also have some limitations: If you tap into the money before you turn 59 1/2, you will be hit with income taxes and a 10% early withdrawal penalty. And by age 70 1/2, you will be forced to make withdrawals, and pay the accompanying taxes.

Roth IRA: For savers who are in a lower tax bracket and can do without the immediate tax savings, a Roth IRA may be a better option, said Wendy Weaver, a Bethesda, Md.-based certified financial planner and portfolio manager at FBB Capital.

With a Roth, you contribute after-tax dollars, but don’t pay any taxes on withdrawals during retirement. The accounts are ideal for young workers since contributions can grow for decades tax-free, helping you to avoid a big tax hit come retirement.

The contribution limit is the same as a traditional IRA($5,500) as long as you don”t exceed income thresholds ($114,000 for single filers and $181,000 for married couples).

Some other pluses: unlike a traditional IRA, you can withdraw your contributions at anytime without any taxes or penalties.However, if you withdraw any investment earnings on those contributions, you will get hit with taxes and the 10% penalty.

Special provisions in federal law allow you to use the earnings from your Roth or tap a traditional IRA without penalty for education expenses or for a first-time home purchase (up to $10,000). You’ll still have to pay income taxes though.

Related: What you need to know about Obama’s ‘myRA’ retirement accounts

If you want to balance out your tax hits between now and retirement, you can split your contributions among a Roth and traditional account, said Weaver. “When it’s time to make withdrawals, you have different buckets of money that have different tax treatments,” she said.

Brokerage account: Still have extra cash to save after you max out your IRA contributions? Brokerage accounts offer a flexible place to invest after-tax dollars, Bera said. Discount brokerage firms like Charles Schwab or TD Ameritrade, for example, allow you to invest in a variety of low-cost mutual funds.

And since you’re using after tax-dollars, brokerage savings can be used for non-retirement purposes as well, such as a down payment on a home. But remember, any earnings you make on your investments will be subject to capital gains tax when you sell them.

MyRA: Should investing in stocks on your own make you a little uneasy,President Obama recently announced the creation of a new “myRA” savings account aimed at workers without workplace retirement benefits.

The accounts, which will be offered through a pilot program later this year, won’t lose money since they will invest in government bonds. But they will also get paltry returns of around 2% to 3%, which will likely barely outpace inflation.

MONEY Taxes

Find Hidden IRA Savings

Illustration by Serge Bloch for TIME

These three lesser-known strategies can help you shelter even more income from Uncle Sam.

Tax day is fast approaching, and with it the deadline for one of the best opportunities to juice your retirement savings and cut your tax bill: an individual retirement account.

Unlike most tax breaks, which expire at the end of the tax year, you have until midnight on April 15 to make a 2013 IRA contribution — of up to $5,500, or $6,500 if you’re 50-plus.

Already putting money in? Pat yourself on the back: Only 15% of households saved in an IRA last year, according to the Investment Company Institute. But you may be missing opportunities to sock away even more. And if you’re not participating because you think your income doesn’t allow it? There’s a workaround for that too, which you ought to consider.

After all, the more you can put away in IRAs, the better. “They’re one of the best tax breaks you can take advantage of for retirement,” says New York CPA Ed Slott, founder of IRAHelp.com.

As you may know, contributions to a traditional IRA are fully deductible up to certain income limits — for 2013, $59,000 in modified adjusted gross income for single folks and $95,000 for couples filing jointly. With a Roth — eligibility for which starts phasing out at $178,000 for couples in 2013 — you get no write-off upfront, but get to withdraw funds tax-free in retirement.

In both types, your money grows without the drag of taxes. (President Obama recently announced another IRA for beginning savers, the MyRA.) Maximize these benefits with the tactics that follow, but you may want to hurry. Time’s running out to reduce your 2013 bill.

Save for a spouse

While the IRS says you must have earned income to stash cash in an IRA, there’s one exception: You can put money in on a spouse’s behalf if he or she has no income, so long as you file jointly. “The IRS doesn’t want to penalize a spouse for not working,” says Adam Glassberg, a financial planner in the Chicago area.

A spousal IRA can be either traditional or Roth, with the same contribution allowances. One big, important difference is that contributions made to a traditional spousal IRA are fully deductible up to a higher income — $178,000 in modified adjusted gross — than for joint filers who both have access to a 401(k). Assuming you qualify for that deduction, a $5,500 contribution will shave $1,540 off your 2013 taxes if you’re in the 28% tax bracket.

Stash self-employment income

Do you work for yourself? Or did you do a freelance gig or two on the side last year? The savings opportunity is especially good for you.

You can contribute as much as 25% of net self-employment earnings, up to $51,000 for 2013, to a simplified employee pension plan, or SEP IRA. That’s in addition to the $5,500 you can put in a traditional or Roth IRA, plus the $17,500 you can put in a 401(k) if you have one through a primary occupation. So it’s an especially worthwhile strategy for moonlighters who are already maxing out a workplace retirement plan. Plus, SEP contributions are fully deductible.

“It’s a really valuable way to save and reduce your taxes,” says Newport Beach, Calif., financial planner Dan Thomas.

Use the back door to a Roth

Even if you make too much to write off a traditional IRA contribution, you’re still eligible to stash money in such an account. Without the deduction, a traditional IRA can lag behind a brokerage account invested in index funds or other tax-efficient holdings. But you may still have good reason to open one: A nondeductible IRA allows you to sidestep your way into a Roth if you wouldn’t otherwise be eligible based on income.

You can convert a traditional IRA to a Roth at any time, no matter your AGI. Assuming you have no other IRAs and shift over the funds immediately — before you have gains — you won’t owe any taxes. (If you do have any existing deductible IRA savings, you will owe prorated tax based on the total balance, to essentially pay back the write-off you took upfront.)

Moving to a Roth can be especially beneficial if you think your tax bracket will be the same or higher in retirement. Unfortunately, this strategy won’t help you fend off Uncle Sam this month, but you might be quite thankful 20 years down the road.

MONEY Ask the Expert

Can My 80-Year-Old Dad Give Me Money from His IRA?

You can't transfer money directly from an IRA to a child. Photo: Shutterstock

Q: My 80-year-old father has a substantial amount in his IRA. Can he give it to his children right now? — Roxanne, Brownsville, Texas

A: Your dad can’t transfer the account directly, says Ed Slott, publisher of Ed Slott’s IRA Advisor newsletter; he could, however, take out all he wants, pay any taxes due, and then hand out the money.

His withdrawals from a traditional IRA, other than nondeductible contributions, would be taxed as ordinary income; Roth IRA withdrawals are tax-free if the account has been open for five years.

Unless the kids need cash urgently, it’s better to name them as beneficiaries.

Upon your dad’s death, a child can keep the assets growing tax-deferred in an IRA, taking mandatory minimum distributions based on life expectancy. Money from a traditional IRA is taxable; inherited Roth money generally isn’t.

MONEY mutual funds

How Much Does Your Money Manager Cost You?

Charley Ellis, founder of Greenwich Associates, worries about the challenges aging boomers face from low bond yields to uncertain stock returns, and dubious financial come-ons. Photo: Joe Pugliese

Wall Street veteran Charley Ellis says your investments are a lot more expensive than you think.

Charley Ellis may not be a household name, but he commands the respect of many savvy investors.

He shook up Wall Street in 1975 with a landmark article in a financial trade journal that attacked the notion that professional money managers consistently beat the market.

Nonprofessionals stand even less chance of outperforming the benchmarks, argued Ellis, so individuals need to rethink their approach to building wealth. That influential piece was the basis for Ellis’s classic investing book, Winning the Loser’s Game, the sixth edition of which is due in July.

Founder of the financial consulting firm Greenwich Associates, Ellis has also served as a director of Vanguard. Today he still worries about investing costs, as well as the challenges that aging boomers face from low bond yields, uncertain stock returns, and dubious financial come-ons.

Ellis, 75, spoke recently with MONEY editor-at-large Penelope Wang. Their conversation has been edited.

Despite recent highs, bear markets and crises have made our readers nervous about stocks. What’s your advice for them?

Ben Graham said that people pay too much attention to what the market is doing currently. And he wrote his wonderful book Security Analysis in 1934. If people look backward, they will have one set of views. As they look forward, they’ll have another.

What kind of returns should people expect?

Seven percent annual average returns for stocks over the next decade is the consensus among the investing pros I talk to. Minus inflation and expenses. So you’re looking at a real return of 5% or less, which is not a lot. But over time you can still do pretty well.

So they should be buying stocks?

They should absolutely invest in a low-cost index fund. But nonprofessionals should forget about stock picking.

For an individual investor, it’s like my saying, “I’d like to play football with the NFL.” You’ve got to be kidding.

You don’t recommend giving money to pros to manage either.

Most active managers underperform because of fees. Some 80% of them would slightly beat the market, but after fees, their returns end up being below the market.

You’ve said that people should think differently about fund costs.

We’ve been describing fees in a way that really is nonsense. We ought to look at fees not in terms of assets, but as a percentage of the incremental returns of a fund — how much extra return you can expect over a comparable index fund.

Think of the 7% expected long-term returns of stocks. A 1.5% fund expense ratio is a big fraction of that 7%.

Now compare that with an index’s expected returns. How much more can you expect from an actively managed fund? Your fee wipes out any advantage — assuming you get those extra returns. Fees as a percentage of incremental returns are unbelievable.

Let’s turn to bonds. What’s your take on them, given ultra low rates?

The best piece of advice I could give long-term investors today is don’t own bonds. And if you do own them, you probably ought to move out of them.

Right now the Federal Reserve is set on keeping rates down. The yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value. People who are putting their retirement money into safe — quote, unquote safe — bonds can get hurt badly.

So someone with half of his or her money in bonds should move it into cash?

Moving entirely out of bonds into money funds or bank CDs may be too extreme for some people. But you can diversify more. You could look at foreign bonds or dividend-paying stocks, though you will be taking on more market risk than you would with CDs. Or you could perhaps stick with a short-term bond fund, which would fall less if rates were to rise. There’s no simple answer.

How and when might bond investors get hurt?

The Fed has enormous information about the economy, and two smart people heading it: vice chair Janet Yellen and chairman Ben Bernanke. They will just likely judge that the time has come to stop pushing rates down. They’ll look for signals like lower unemployment and higher inflation. I would expect to see rising rates in the next three, five, 10 years.

So what should pre-retirees do if they don’t know how to be invested for retirement?

One thing they should beware of: Bad guys are tracking who’s getting close to retirement. And they’re targeting people with pitches — mail, email, phone calls.

You get a lot of very sexy propositions: “Now is the time for you to break free” and “You’re entitled to control of your investments.” “This is, after all, your money. You should get it done your way.”

All this “you, you, you” stuff. The truth is, in all too many cases, people will get stuck with something that costs way too much and won’t deliver on promises.

How can you avoid getting stuck?

Anyone rolling over an IRA needs to be super-careful. If you hear from someone that you don’t know or someone from a firm you’ve never heard of, check them out. There are a lot of tough players out there who are selling all types of products and who don’t really worry about what happens to you.

So if you’re being offered something, ask the salesperson to put the numbers in writing and ask him, “Would it be a good idea if I run this by my accountant or my lawyer?” If he doesn’t like that idea, that tells you something.

It’s not just about a particular product, but also about how you buy it. Low-cost annuities are a good idea, but sales commissions often make them not that good a deal when you purchase them.

You should check fees rigorously. There are usually several ways to buy anything.

You also think that people should adjust their timetable for investing.

For someone around the age of 60, a 30-year time horizon for investments is perfectly sensible. If you have a younger spouse, it could be even longer than that.

You can change your behavior by thinking really long term. You can stop being flustered so much about daily market moves or even what the market does this year.

The longer your time horizon, the more you will surely invest in equities, which will help you build financial security. With a long time horizon, you will also focus more on protecting your family — your spouse and your kids — even after you’re gone. I’d like to help my grandchildren get to college.

MONEY Ask the Expert

Our Expert Reveals His Personal Retirement strategy

Q. I’ve gotten lots of valuable help from your column over the years, but have always wondered about your personal retirement strategy. Have you been faithful to your own advice? — Jim K., Madison, Wis.

A. I haven’t said much about my own finances in the more than 1,000 Ask the Expert columns I’ve written over the past 13 years. Everyone’s situation is different, so I wouldn’t want people to assume they should follow a particular strategy or invest in a certain way just because “The Expert” has done so.

But since I’ll be leaving MONEY at the end of this month, I thought it would be appropriate to share the overall approach I’ve taken to retirement planning during my 26 years at MONEY in the hope that readers might apply it not in every particular, but in a general way to their own planning.

I’m not going to get into the nitty-gritty details. My wife would have my head if I started divulging account balances and such. Rather, I’ll break down my retirement-planning efforts into two broad categories, specifically: What I’ve Done Reasonably Well and What I Could Have Done Better.

What I’ve done reasonably well

The single most effective thing I’ve done is save on a regular basis.

Whether my zeal for saving reflects an innate impulse, a reaction to my family’s precarious financial situation as I was growing up, a rational decision to stash away money for the future or a combination of these, I can’t say. But I can say that for whatever reason I’ve always tried to live below my means and contribute the max (or as close as I could get to it) to tax-advantaged retirement plans.

For example, as a freelance writer prior to joining MONEY, I opened and funded a Keogh account and then a SEP-IRA, both of which are retirement savings plans for the self-employed.

Once I became a MONEY staffer, I made it a point to take advantage of virtually every opportunity my employer offered to save, including the company 401(k) plan, which I funded to the max pretty much every year.

I also applied the 401(k) system of automatic payroll deductions to saving outside of tax-advantaged plans. In the late ’90s, I set up an automatic investing plan, directing a mutual fund company to transfer $300 a month (later increased to $500) from my checking account to a stock fund. I felt a pinch at first, but after a few months I adjusted quickly to having a little less spendable income.

Today, those monthly transfers, plus investment earnings, total in the low six figures. Hardly a fortune, but a nice little sum of what I think of as “extra” money, in the sense that I otherwise would have squandered that dough on lord knows what.

I think I’ve also done a decent job on the investing front. Not that I’ve employed any grand strategies. Far from it. My not-so-secret secret has been to keep it simple and hold the line on costs.

I’ve never had much faith in money managers’ ability to beat the market after investment costs, nor in my ability to predict which asset classes would perform best in the short-term. So for the most part I’ve tried to build a portfolio of low-cost broadly diversified index funds that track the overall stock and bond markets. Then I sat back and rode the long-term upward sweep of the financial markets.

Granted, that ride has been a bit bumpy at times. But I’ve found that the best way to deal with the market’s inherent uncertainty and volatility isn’t to try to outguess it by jumping in and out of the market. Rather, it’s to gauge your risk tolerance and then set a mix of stocks and bonds that will allow you to participate in the upswings while enduring the downturns without panicking and selling at the bottom.

One final trait that’s served me well has been my inclination to ignore the fads, crazes and shifting fashions that pop up so often in the investment world.

I suppose a critic could see this as a failing, my inability to embrace innovation. Perhaps. But over the years I’ve seen too many Next Big Things (option-income funds, world currency funds, government plus funds, auction-rate preferred securities, to name just a few) implode, hurting investors in the process.

So anytime someone touted a revolutionary new exchange-traded fund, an alternative investment designed to generate all-gain-no-pain or a novel withdrawal strategy guaranteed to boost your retirement income and extend the life of your nest egg at the same time, I reacted with a heightened sense of skepticism. I recommend you do the same.

What I could have done better

Of course, with the benefit of 20-20 hindsight we can all point to things that we’d do differently given a second chance. One area where I definitely could have improved (and still hope to do so in the future) is coordinating my wife’s retirement investments with my own.

You would think in these days of instant online access to investment accounts that a married couple could easily share information about how their 401(k)s and other savings are invested. But in the real world tasks like sifting through retirement accounts and making sure our various pots of savings are invested in a complementary way sometimes take a backseat to other work and family issues.

So despite assurances from both of us that “we’ll definitely sort out the finances this weekend,” a year slips by and my wife’s 401(k) balance with a former employer still hasn’t made its way into an IRA rollover or her new employer’s plan.

Another place my planning fell short was in moving my retirement portfolio to a more conservative stance as I, ahem, aged. The issue isn’t ignorance. I know that as you get older you should generally shift your portfolio more toward cash and bonds to preserve capital and protect against severe market downturns.

But even though every day in the mirror I saw a man approaching his 60s, in my mind I was still that young guy in the ’60s. I have since gotten my portfolio in shape. But I mention this shortcoming so other people out there will remember to keep their asset allocation in line with their biological age even if mentally and emotionally they feel much younger.

Finally, I could have prepared better for my next stage of life. I’m not actually retiring. I expect that one way or another I’ll continue weighing in about retirement planning, investing and personal finance. I’m also keeping my mind open, to paraphrase Monty Python, “for something completely different.”

Still, leaving the place where you’ve spent the major part of your career is a big deal, and ideally I should have given that transition more thought ahead of time, much as I’ve counseled others to do. That said, you can’t always plan your life down to the smallest details. You also have to be willing to leave yourself open to serendipity and chance.

So all in all the answer to your question is yes, I have largely been faithful to my own advice, despite the occasional lapse. And if it’s any consolation, I’ve found that as long as you get the big things in retirement planning right—save consistently, invest sensibly, avoid rash moves and ignore fads and marketing gimmicks — you’ll do just fine even as you make a few inevitable missteps along the way.

MONEY

Retirement Saving: Catching up in Your 20s

I’m in my late 20s and am behind in preparing for retirement. What’s the best way to catch up? — Taylor, Winston Salem, N.C

I’m happy to see someone so young so concerned about planning for retirement. But let’s not get carried away here. If you’re still in your 20s, it’s hard to imagine that you could have fallen very far behind.

You’re at the beginning of your career, which means you’ve got a good 35 to 40 years of working, saving and investing ahead of you. So even if you’ve done nada to date, there’s no reason to panic.

That said, you don’t want to put this off any longer, and the best way to get started is to realize from the get-go that the single best way to assure yourself a comfortable retirement is to save as much as you can on a regular basis.

That’s true whether you’re behind and trying to get back on track, or if you’re already on course and want to stay there.

Unfortunately, a lot of people are under the mistaken impression that smart investing is the surest route to retirement security. I suspect that’s because the financial press spends so much time obsessing about the markets and giving the impression that you can easily boost your returns by deftly shifting your money around.

Related: Maxed out Your 401(k)? Here’s How to Save More for Retirement

If only it were so. But the fact is that while investing is certainly important, increasing the amount you save is a much more effective method of improving your retirement prospects.

Speaking of saving, it just so happens that the U.S. Senate has designated this week as National Save For Retirement Week. If you’re into florid legislative language with “whereas this” and “resolved that,” you can take a look at the actual resolution. But if you prefer to do something more practical to jump start your retirement planning, I suggest you do the following.

First, get a handle on how much you should be salting away each year. With retirement still so far off there’s no way to know precisely how much you need to set aside. But you want to at least arrive at a ballpark figure.

When you’re further along in your career, try a more robust retirement calculator that allows you to get a more customized assessment of whether you’re saving enough, how your savings are invested, how much you expect to collect in Social Security and pensions and your planned retirement age. For now, though, a rough estimate is just fine.

Next, make sure you’re taking full advantage of tax-advantaged savings options, as mitigating the tax bite can leverage your savings effort and help you build a larger nest egg. Fortunately, this is a message that appears to be getting through. When asked to identify the best retirement-savings vehicles as part of a recent Wells Fargo Retirement Fitness Survey, 71% of the 1,000 people polled named a 401(k) or IRA.

Related: Should I Quit My Job and Travel?

Clearly, the 401(k) allows you to put away more bucks — a max of $17,500 next year, plus a $5,500 catch-up contribution for anyone 50 or older — plus it has the advantage of automatic payroll deductions and, in most cases, employer matching funds.

But with a current annual max of $5,000 plus a $1,000 catch up, the IRA can also be a powerful savings tool — and you may even be able to do both. If you can still afford to save after maxing out your 401(k) and an IRA, you can move on to tax-efficient vehicles like index funds, ETFs and tax-managed funds.

Once you’ve got the savings side of the equation covered, you can focus on investing. But your aim here isn’t to stuff your retirement accounts with every investment the marketing gurus on Wall Street can come up with. Rather, you just want to create a basic diversified portfolio of stocks and bonds, keep costs low and rebalance once a year so your portfolio doesn’t get too stock-heavy during bull markets or overweighted in bondsshould stocks take a tumble.

Bottom line: You’ve still got plenty of time to bulk up your nest egg, and if you follow the plan I’ve outlined, you should have no trouble doing so. But make sure you started now because if you wait too long you really will fall behind.

MONEY Ask the Expert

5 Tips to Boost Your Retirement Savings

Q. I’m in my mid-30s and max out my 401(k) and a Roth IRA every year. I also invest $4,500 a year in mutual funds. What more should I be doing to prepare for retirement? Should I invest in individual companies in addition to funds? — Brian B., Jacksonville, Fla.

A. Sounds like you’re already taking the most important steps to get on the path to a secure retirement. You’re saving on a regular basis, maximizing tax-advantaged options — you’re even going above and beyond by investing a substantial sum in a taxable account each year.

Assuming all that saving amounts to a reasonable percentage of your annual income — say, 15% or so — I don’t think you need to make any radical changes.

That said, you may be able to enhance your retirement prospects by improving your retirement-planning strategy a bit. The key, though, is concentrating your efforts in areas that are likely to have the highest payoff.

Here’s what I recommend:

1. When it comes to investing, keep it simple. Unless you believe you have unique insights into the financial prospects for specific companies, I’d pass on investing in individual stocks. Without an edge, you’re not likely to outperform the market averages, and you could end up dragging down your returns.

Similarly, ignore the endless variety of niche funds and ETFs that investment firms constantly churn out. Here, I’m talking about funds and ETFs that home in on particular sectors of the market — oil, gas, platinum, gold, currencies, individual foreign countries, etc. — or that employ risky or arcane investing techniques, a la inverse funds and leveraged ETFs. It’s tough to integrate such investments into your portfolio in a coherent way, and they’re ultimately not worth the extra expense and effort.

Instead, focus on building a straightforward portfolio of broadly diversified stock and bond funds that will give you exposure to all areas of the market. For guidance on how to divvy up your money — between stocks and bonds overall and among particular types of stocks and bonds — just plug the ticker symbol for the Vanguard target-date retirement fund designed for someone your age — in your case, the 2040 or 2045 fund — into Morningstar’s Portfolio X-Ray tool. You don’t have to mimic its allocations precisely, but you probably don’t want to stray too far from them either.

2. Aim for lower costs. Your best shot at boosting your returns without taking on additional risk is to invest as much as possible in low-expense funds. Generally, that means looking for stock funds that have expense ratios below 1% and bond funds with expense ratios less than 0.75%. You can do even better, though, by sticking to low-cost index funds and ETFs like those on the MONEY 50 list of recommended funds.

Of course, in your 401(k) you’re limited to the menu of investments offered by your plan. But by perusing the fee disclosure the Department of Labor now requires plan sponsors to provide, you should be able to sift through your 401(k)’s investment roster and choose reasonably priced options.

3. Beware investment pitches based on tax benefits. After investing all you can in tax-advantaged 401(k)s and IRAs, you can plow any extra savings into taxable accounts, as you’re already doing to the tune of $4,500 a year.

Just be careful. Many advisers are quick to recommend variable annuities or life insurance investments for taxable accounts because of their potential tax savings. Problem is, these options typically come with high fees, not to mention a mind-numbing level of complexity.

Related: The Case for Investing in Bonds, Too

A better solution is to stash any saving you do outside 401(k)s and IRAs in tax-efficient investments like index funds, ETFs and tax-managed funds. You’ll likely pay far lower expenses, which will give you a better shot at a higher after-tax rate of return.

4. Save more as your income rises. There’s a natural tendency for people to ratchet up their lifestyle at a faster rate than their paycheck as it grows. But that can lead to problems come retirement time. The reason: As your income climbs, the percentage of your pre-retirement salary that Social Security will replace starts to shrink.

So the more you earn during your career, the more you’ll have to depend on your personal savings to maintain your standard of living in retirement. To avoid having to scale back your lifestyle during retirement, try to increase the percentage of your income you save as your earnings increase.

5. Monitor your progress. Over the course of a career, any number of setbacks — layoffs, market downturns, etc. — can derail even the best laid retirement plans. That’s why it’s crucial to evaluate how things are going and make adjustments if necessary.

You can do that several ways. One is to periodically assess the balance of your retirement accounts relative to your annual income. The important thing, though, is that one way or another you come away with a realistic sense of whether your current saving and investing plan is working and, if not, make the necessary tweaks to put you back on track.

You already appear to be off to an excellent start in your retirement planning. And if you follow these five tips, your chances of making a smooth transition from the work-a-day world to your post-career life should be just as upbeat.

MONEY

IRAs Inspire Uneven Loyalty

Only a fraction of Americans contribute to an IRA, but the ones that do tend to take it to the max.

That’s one of the findings from a recent study of 10 million individual retirement accounts conducted by the Investment Company Institute, a mutual fund industry trade organization. The study — which also indicates that women are more likely to contribute to an IRA than men are, that the wealthy are more likely to contribute than the poor, and that people’s contribution activity peaks in their late 50s — illustrates that IRAs can be a powerful tool for retirement, but that benefits aren’t spread evenly throughout the population.

As of 2004, according to IRS figures, about 2 in 10 American taxpayers had a traditional IRA.

Among working-age Americans who do have an IRA, the contribution rates are low, according to the ICI study, which examined data from 2007 and 2008. At the close of 2008, IRAs amounted to more than one-fourth of Americans’ retirement savings, but that year only 9.4% of traditional IRA owners made a contribution. If one includes Roth IRAs, the activity rate increases: In 2007, when 11.2% of traditional IRA owners made a contribution to their accounts, an additional 5.4% of them put all their new contributions into a Roth.

Why is the contribution rate for traditional IRAs so small? The ICI says this could be because of competition from other retirement savings options, such as 401(k) plans and Roth IRAs, or because of limitations on the tax-deductibility of traditional IRA contributions.

And yet the people who do use traditional IRAs are committed to them. In 2007, 60% of contributors in 2007 put in the legal limit. In 2008 — a rotten year for the market, and one in which legal limits increased from the prior year — about 50% maxed out.

That decline in the share of people taking advantage of the legal limit points to another interesting pattern: Many contributors who don’t maximize their contribution are instead depositing a round-number amount that was the maximum allowable contribution in prior years — say, $2,000 or $3,000. It seems that the power of inertia is strong — and that people don’t often bother to check year-to-year and see whether various IRS limitations on retirement-plan contributions changed.

So that you don’t unnecessarily underfund your IRA, check out the IRS rules for 2010 limits. You can also visit the IRS site for in-depth information about Roth IRAs and guidelines for 401(k) plan contributions.

To shed further light on investor behavior, the ICI promises more IRA-account-behavior studies, which, like this one, will be mined from a new database it developed with the Securities Industry and Financial Markets Association.

In the meantime, tell us about your own IRA behavior. Do you contribute to a traditional IRA or a Roth? Are you maxing out your contribution? Tell us why or why not.

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