This Overlooked Strategy Can Boost Your Retirement Savings

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Andy Roberts—Getty Images

Many high-income investors use a "backdoor" strategy to save in a Roth IRA, but there's another workaround you may not have considered.

The “backdoor Roth IRA”—a technique that allows investors barred from contributing to a Roth because their income is too high to fund one by opening and immediately converting a nondeductible IRA—has gotten considerable attention lately. Some people are concerned that a future Congress might eliminate the strategy; others worry that simultaneously funding and converting a nondeductible IRA might violate the “step transaction” doctrine. But while the backdoor route remains viable, at least for now, high-income investors may want to consider an alternative that can often get more money into a Roth.

The backdoor Roth IRA has been effective for many investors whose income prevents them from contributing to a Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible to do a Roth.) But the strategy can get complicated if, like many affluent investors, you already have pretax money in traditional IRAs. The reason is that even if the nondeductible IRA you just funded has no investment gains and thus consists entirely of after-tax money, you would still owe income taxes when you convert the account to a Roth. Why? Well, in the eyes of the IRS, you’ve got to take into account the money in your other non-Roth IRA accounts, even if you’re converting only a specific account.

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Here’s an example. Let’s say you have $100,000 in pretax dollars you transferred from a previous employer’s 401(k) into a rollover IRA and that you decide to contribute $5,500 to a nondeductible IRA (the max for anyone under 50) with the intention of immediately converting to a Roth. Even though you may think you own no income tax on the conversion since that $5,500 contribution was in after-tax dollars, the IRS looks at it differently.

From its point of view, you have $105,500 in IRA accounts (your $100,000 rollover IRA plus the $5,500 nondeductible IRA), 95% of which ($100,000 pre-tax divided by $105,500 total) consists of pretax dollars and thus is taxable, while 5% is nontaxable after-tax dollars ($5,500 after-tax divided by $105,500). So when you convert your $5,500 nondeductible IRA to a Roth IRA, the IRS assumes that 95% of that amount, or roughly $5,225, is taxable pre-tax dollars and 5%, or $275, is nontaxable after-tax dollars. If you’re in the 28% tax bracket, that means you owe about $1,463 in income tax (28% of $5,225) when you do the conversion. In short, you must come up with $6,963—$5,500 plus $1,463 in taxes—to get $5,500 into a Roth IRA.

If you participate in a 401(k) that accepts IRA money—and has investment options and fees you consider acceptable—you may be able to get around the conversion tax by rolling your $100,000 IRA into the 401(k). That would leave you with only your nondeductible IRA consisting of nontaxable after-tax dollars, which means you would owe no tax converting it to a Roth.

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But if moving your IRA money into a 401(k) isn’t an option—or if you would like to get more than $5,500 into a Roth IRA—there’s another option: Namely, take the money that you would have used to fund the nondeductible IRA and pay the tax to convert the nondeductible IRA—$6,963 in this example—and use that money instead to pay the tax to convert as much of your rollover IRA as possible to a Roth IRA. Assuming once again that you’re in the 28% tax bracket, $6,963 would be enough to cover the tax to convert nearly $25,000 ($24,868, or $6,963 divided by 28%) of your rollover IRA to a Roth IRA. Result: you end up with nearly $25,000 in a Roth instead of $5,500.

What you’ve really accomplished by doing the straight conversion instead of funding-then-converting a nondeductible IRA is tilt your mix of traditional IRA and Roth IRA money more toward the Roth side. If you had taken the backdoor Roth IRA route, you would have ended up with $100,000 in your rollover IRA and $5,500 in a Roth IRA. By doing a conversion with the nondeductible contribution and what you would paid in tax to convert the nondeductible IRA to a Roth, you end up with roughly $75,000 in a traditional IRA and about $25,000 in a Roth IRA.

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At first glance, it may seem that you’re better off with the $105,500 total balance you would have by going the back-door Roth route rather than the smaller $100,000 in IRA balances you would end up with by doing a straight conversion instead. But in terms of after-tax dollars you could still come out ahead down the road by having the slightly lower total balance but more dollars in the Roth IRA. Whether you do or not depends largely on the tax rate you face when you withdraw money from your IRA accounts. If you face a higher marginal tax rate at retirement—say, 33% instead of 28%—then you’ll end up with more money after taxes by having more of your IRA funds in the Roth IRA. If you drop to a lower marginal tax rate—say, from 28% to 15%—then you’ll have more after-tax dollars with a smaller Roth—that is, the combination of the back-door Roth IRA and traditional IRA. If you stay at the 28% marginal rate, or even drop slightly to 25%, the straight conversion comes out ahead, although the edge will likely be relatively modest.

Of course, it can be hard to predict what tax rate you’ll face in the future, which is why I think it’s reasonable to diversify your tax exposure by having some money in both traditional and Roth retirement accounts (not to mention taxable accounts with investments that generate much of their return in capital gains that will be taxed at the lower long-term capital gains rate). Roth IRAs also have other advantages that can make them a worthwhile choice, including giving you more flexibility in managing your tax bill in retirement.

Keep in mind too that any pretax dollars you convert are considered taxable income, which, combined with your other income, could push you into a higher tax bracket. If you find that’s the case, you may want to limit the amount you convert to avoid a higher tax bill and possibly undermine the benefit of a Roth.

Bottom line: If your income prohibits you from doing a Roth IRA and you have no non-Roth IRAs, the back-door strategy can be an effective way to get money into a Roth. But if you already have other IRAs and you would like to get more money into a Roth IRA than you can squeeze through the back door, the conversion strategy I’ve laid out above may be a better way to go.

Walter Updegrave is the editor of If you have a question on retirement or investing that you would like Walter to answer online, send it to him at You can tweet Walter at @RealDealRetire.

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3 Pro Tips for Anyone Who’s Confused About Roth IRAs

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Not everyone can contribute to one, and it may not be the best choice even if you can.

Roth IRAs can be retirement savers, if used effectively. Most people familiar with them know just the basics, but it’s good to learn more, lest you run afoul of some rules or not take advantage of some benefit. Today, three Fool contributors offer information you might not know or appreciate about Roths. H&R BLOCK HRB 0.29%

First, though, let’s review exactly what a Roth IRA is, by contrasting it with its counterpart, the traditional IRA. With the traditional IRA, you contribute pre-tax money that reduces your taxable income and, therefore, your tax bill for the year. When you withdraw the money in retirement, it’s taxed as ordinary income to you. With the Roth IRA, you contribute post-tax money — i.e., sums that don’t offer any upfront tax break. But you do get a tax break, and a potentially big one, when you withdraw from the account in retirement — because you get to take all the money out of the account tax-free.

Dan Caplinger: The Roth IRA’s best trait is that it can produce income and capital gains that’s entirely tax-free, even after you withdraw it for use in retirement. In order to get that favorable tax-free treatment, though, you have to follow the rules; if you don’t, some of your Roth gains might turn out to be taxable after all.

Contributions to Roth IRAs are never taxed, because they represent post-tax contributions that you made voluntarily. When it comes to the income and gains on those contributions, though, different rules can apply. First of all, if you withdraw any Roth income within five years of having set up the account, you’ll have to pay taxes and penalties of 10% on the withdrawn amount. Second, if you haven’t reached age 59 1/2, then you’ll end up paying taxes on the portion of your withdrawal that represents earnings on your Roth assets. You might be able to have penalties waived if you qualify for certain special distributions, such as for a first-time home purchase, but often, you’ll still owe tax.

Because withdrawals of contributions, either through direct deposits or via conversions of traditional retirement assets, are generally eligible for tax-free treatment, it’s rare to have to pay income tax on a Roth IRA. However, the potential does exist, so make sure you know the rules before you take money out.

Jason Hall: The obvious benefit of a Roth, as Dan explained, is the tax-free growth and tax-free distributions in retirement. But what many people don’t realize is that you may be giving up a bigger benefit today, especially if you pay a higher marginal tax rate now than you’ll pay when you retire.

If this is the case for you, then here’s one approach that’s worth considering.

If you take the amount that you’d normally contribute to a Roth (the maximum for those aged 49 and younger in 2015 is $5,500) and instead increase your contributions to your 401(k), you’ll reduce your taxes each year. If you pay 28% in federal taxes, that’s $1,540 more you’ll take home this year. Instead of taking it home, though, put that in your Roth. If you were to start doing this at 40 and keep it up until 65, you’d end up with nearly $133,000 more, based on an 8% annualized rate of return:

That would be worth about $1,600 per year in additional income if your tax rate fell to 20% in retirement, and you took the typical 4% yearly distributions.

Selena Maranjian: Many people don’t realize it, but contributions to Roth IRAs aren’t allowed for everyone. It’s possible to earn so much that you’re prohibited from contributing or that you’re allowed only a reduced amount. Income limits are based on your modified adjusted gross income, or AGI. For 2015, they are as follows:

Filing Status Modified AGI Maximum Contribution
Married filing jointly or qualifying widow(er) < $183,000 up to the limit
> $183,000 but < $193,000 a reduced amount
> $193,000 zero
Married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
> $10,000 zero
Single, head of household , ormarried filing separately and you did not live with your spouse at any time during the year < $116,000 up to the limit
> $116,000 but < $131,000 a reduced amount
> $131,000 zero

Source: IRS.

Your modified AGI is your AGI, with any of the following deductions you’re taking added back to it: student loan interest, half of the self-employment tax, qualified tuition expenses, tuition and fees deduction, passive loss or passive income, IRA contributions, taxable social security payments, the exclusion for income from U.S. savings bonds, the exclusion under 137 for adoption expenses, rental losses, and any overall loss from a publicly traded partnership.

If you’re wondering about traditional IRAs, your income doesn’t limit your ability to contribute the maximum each year, but the deductibility of your contributions may be limited or entirely eliminated.

Finally, know that — for now — there’s a “back-door” way to fund a Roth IRA for high earners that involves making a nondeductible IRA contribution and then converting that newly created IRA to a Roth. It’s frowned on by some in Congress, so it might disappear one of these years, but for now it’s available.

If you’re a high earner, it’s important to understand these Roth IRA restrictions. Most of us, though, won’t be affected by them.

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This Is the Biggest Mistake People Make With Their IRAs

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Too many investors view IRAs simply as parking accounts for their rollover 401(k) money.

Millions of American have IRAs. Some people, like me, have multiple IRAs, but hardly anyone makes regular contributions to these accounts. According to a recent study by the Investment Company Institute (ICI), only 8.7% of investors with a traditional (non-Roth) IRA contributed to them in tax year 2013.

The Employee Benefit Research Institute’s IRA database, which tracks 25 million IRA accounts, estimates an even smaller percentage of investors contributed to their traditional IRA accounts—just 7%.

The problem, it seems, is that many people have come to see IRAs as a place to park money rather than as a savings vehicle that needs regular, new contributions. Most IRAs are initially established with money that is rolled over from an employer-sponsored 401(k) when a worker changes jobs or retires.

As savings options, IRAs are inferior to 401(k)s, which typically offer employer matches and a tax deduction for your contribution. With IRAs, the deduction for contributions is more limited. If you are already covered by a plan at work, you qualify for a tax deduction to a traditional IRA only if your income is $61,000 or less. Moreover, the contribution limit for IRAs is low—$5,500 a year, or $6,500 if you’re 50 and older. By contrast, the contribution limit for a 401(k) is $18,000 this year ($24,000 for those 50 and older).

Still, traditional IRA accounts will let your money grow tax-deferred; with Roth IRAs, you contribute after-tax money, which will grow tax-free. Adding an extra $5,500 a year to your savings today can make a sizable difference to your retirement security. Even if you don’t qualify for a deduction, you can make a nondeductible contribution to an IRA. (Be sure to file the required IRS form, 8606, when you make nondeductible contributions to avoid tax headaches.) Still, as these new findings show, most people don’t contribute new money to any IRA.

I get it. I have two traditional IRAs from rollovers and have been making the mistake of not contributing more to them for years. Since my traditional IRAs were started with a lump sum, I mistakenly viewed them as static (though still invested) nest eggs. If I had thought of them as active vehicles to which I should contribute annually, I would be on much firmer footing in terms of my “retirement readiness.” (I also have a SEP-IRA that I can only contribute to from freelance income, and a Roth IRA which I converted from a third rollover IRA one year when it made sense tax-wise to do so, but also now can’t contribute to. No wonder I find IRAs confusing.)

The ICI’s report suggests that very low contribution rates for IRAs “are attributable to a number of factors, including that many retirement savers are meeting their savings needs through employer-sponsored accounts.” But that explanation is misleading. Even those lucky enough to have access to 401(k)s need to have been making the absolute maximum contributions every year since they were 23 years old to feel confident they’re saving enough.

IRAs are a valuable and often overlooked part of the whole plan—and for many without 401(k)s, they are THE whole plan. There has been a lot of attention on improving 401(k) plan participation rates by automatically enrolling employees. But only recently has there been more focus by policymakers on getting people to contribute to their IRAs on a regular basis, including innovations like President Obama’s MyRA savings accounts and efforts by Illinois and other states to create state savings plans for workers who lack 401(k)s. These are worthy projects that need an even bigger push.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

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Everything You Need to Know Before Opening an IRA

Here's why you should get one, how to choose the right one, and what to do if you already contribute to a 401(k).

According to the Social Security Administration, the average retirement benefit paid in 2013 was $1,451 per month to men, and $1,134 per month to women. That’s good for about $31,000 per year for a retired married couple, which is a far cry from the roughly $49,000 U.S. median annual income. We’re talking about a $18,000 income gap between Social Security and the median household.

Whether you’re a few years or a few decades from retirement, you can bridge the gap between Social Security and what you’ll need to live comfortably in retirement with an IRA, or individual retirement account. This is a personal account that you can fund each year, allowing you to save on taxes and building income for when you retire. Before you open that retirement account, it’s vitally important that you understand your options and the implications.

Here’s a closer look at everything you need to know before opening an IRA

What’s an IRA?
In short, it’s a savings and investment account that allows you to set aside money each year — up to $5,500 for 2015 — with some big tax benefits. There are two kinds of IRAs, with slightly different benefit structures.

A traditional IRA is most common, and offers a number of benefits, including potentially deducting contributions from your taxable income the year you make them. In other words, if your total income is $50,500 in 2015, and you contribute $5,500 to a traditional IRA, your taxable income would be $45,000.

If your employer offers a retirement program like a 401(k), you might not be able to deduct all of your IRA contributions from your income. Refer to the table below to see if you qualify for a deduction in 2015 based on your adjusted gross income, or AGI. Nonetheless, regardless of whether you qualify for a deduction, those contributions would grow tax-free until you begin taking distributions in retirement, at which point the distributions would be counted as regular income, and taxed at your nominal tax rate.

Screen Shot 2015-07-27 at 1.19.38 PM

The Roth IRA is in some ways superior. You can contribute the same $5,500 in 2015, but contributions are not deductible from your income. However, once the money is in the account, it’s never, ever taxed, as long as you take distributions after retirement age. In other words, you can create a source of completely tax-free income in retirement with a Roth.

You may also be considering a “rollover IRA” if you recently left your employer but want to take your 401(k) with you, or want to consolidate several old 401(k)s. By rolling over your funds, you don’t pay taxes and keep growing your money tax-free until taking distributions in retirement. A rollover IRA is basically a traditional IRA, but brokers use this designation to make it simpler for consumers to pick the right account to rollover funds.

Start now, even if you can’t max it out
Even if you can’t contribute the maximum amount each year, it’s worth starting as soon as you can, and with any amount you can afford. You’d be stunned by how big a difference it can make:

Screen Shot 2015-07-27 at 1.18.32 PM

Even small amounts can add up big over time. And that’s before considering the tax benefits, whether while still working or in retirement.

Which IRA should you open?
The answer is, “it depends”. It may seem like the Roth makes the most sense — tax-free retirement income is a no-brainer, right? — but it really boils down to a combination of your entire current situation, your current income, and tax status.

If you’re doing a rollover, you’ll need to open the same kind of account as the one you’re rolling over. If you have a Roth 401(k) — which are less common but growing in popularity — you’d need to rollover your Roth (401)k to a Roth IRA. And if you already have a traditional IRA, you can rollover your 401(k) into that account, without opening a new “rollover IRA”. The good news is your online broker (find a good one here) can help set up the right kind of account. Be sure to shop around, as many will give you bonus money, depending on the size of your rollover.

If you’re not doing a rollover, a Roth is the best choice for most folks, since the majority of workers have a retirement plan through their employer, and fall within the adjusted gross income limits set by the IRS each year. Here are the 2015 limits:

Screen Shot 2015-07-27 at 1.16.54 PM

If your income is above the amounts above, you can’t contribute to a Roth, but you can still contribute to a traditional IRA as there are no income limits. You won’t be able to deduct the contributions from your income if you have a retirement plan at work, but it will still grow tax-free.

If you don’t have a retirement plan at work and fall below the income guidelines in the table above, you may want to consider a traditional IRA over the Roth, especially if your effective tax rate today is likely to be higher than it will in retirement. If that’s the case, the tax savings today are worth more than than tax-free income in retirement.

This only applies to a small number of mostly self-employed people. If you’re in that category, you should consider opening a self-employed 401(k), since you can contribute a much larger amount to a 401(k), as much as $51,000 in 2015, based on combined employer and employee contributions.

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Use the Backdoor Roth IRA Before It Disappears

Patricia McDonough—Getty Images

Making a nondeductible IRA contribution, then converting that newly created IRA to a Roth can limit your tax liability.

Few investors appreciate just how revolutionary the Roth IRA was when it first became available almost two decades ago. Traditionally, retirement accounts have been a method of deferring taxable income, with contributions to traditional IRAs and 401(k)s not included in current-year income, but with eventual withdrawals in retirement subject to income tax. The Roth IRA’s truly tax-free treatment of retirement savings has appealed to millions of investors, but because of income limits on making contributions, many high-income savers don’t have direct access to Roth IRAs. Starting in 2010, the opportunity to create a backdoor Roth IRA became available even to those who were locked out by income limits. Yet with some lawmakers seeing backdoor Roth IRAs as an abuse of the retirement vehicle, you should consider using the strategy now while it’s still available. Let’s take a closer look at the backdoor Roth IRA, why it’s so valuable, and why some people want to make it disappear.

Sneaking into a Roth through the backdoor
Back when Roth IRAs first came into existence, high-income individuals found themselves locked out of the new retirement accounts. Even now, single filers with adjusted gross income above $131,000 aren’t allowed to make Roth IRA contributions, and for joint filers, a limit of $193,000 applies. Moreover, conversions from traditional IRAs to Roth IRAs weren’t allowed for those with incomes above $100,000. The combination of those factors created an insurmountable barrier to high-income savers wanting Roth access.

In 2010, though, lawmakers repealed the income limit on Roth conversions. That opened the door to Roth IRAs for high-income individuals for the first time, but it came with a hitch: Most of the time, when you convert a traditional IRA to a Roth, you have to pay income tax on the converted amount. Given how high the tax rates are for these upper-income taxpayers, paying Roth conversion tax isn’t a very attractive proposition.

The backdoor Roth IRA gets around this problem by taking advantage of another tactic: the nondeductible regular IRA. Most high-income individuals aren’t eligible to deduct their traditional IRA contributions because of similar income limits, but nondeductible traditional IRAs are available to anyone with earned income. Therefore, the two-step method for the backdoor Roth involves making a nondeductible IRA contribution and then converting that newly created IRA to a Roth.

If your nondeductible IRA is the only traditional IRA you own, then the Roth conversion doesn’t create any tax liability. That’s because the IRS recognizes the fact that you didn’t get a tax deduction for your initial nondeductible IRA contribution, and so it essentially gives you credit for that contribution when considering the tax impact of the rollover.

Setting up for a backdoor Roth IRA
For many savers, though, the nondeductible IRA isn’t their only traditional IRA. If you have made past IRA contributions and got tax deductions from them, then the IRS requires you to treat the conversion of your nondeductible IRA as if it came pro rata from all your IRA assets. That will subject part of the converted amount to tax.

However, there are a few things you might be able to do to rearrange your finances to use the backdoor Roth IRA strategy. Many employer 401(k) plans allow workers to roll their IRA assets into their 401(k) accounts, and money that’s in a 401(k) avoids the pro-rata tax problem because of its being an employer plan rather than an individual IRA. Similarly, those who are self-employed can use self-employed 401(k) arrangements and provide for the same asset movement to set up their tax-free backdoor Roth.

Get it done
The sense of urgency about backdoor Roth IRAs comes from the fact that policymakers have increasingly seen the strategy as a form of unfair tax avoidance. The Obama administration’s proposed budget for fiscal 2016 included changes that would put a halt to the backdoor Roth IRA by preventing Roth conversions involving funds from nondeductible IRAs or voluntary after-tax contributions to 401(k) plans. The budget proposal hasn’t become law and likely won’t, but in future, lawmakers might well target the backdoor Roth as something that unfairly benefits high-income taxpayers.

For now, though, the backdoor to a Roth IRA remains open, and high-income individuals should look closely at their financial situation to see if they can take advantage of it. Having tax-free retirement money available to you can be extremely valuable, and the backdoor Roth is the best — and often only — way for people subject to income limits to get the benefits of this retirement vehicle.

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MONEY 401(k)s

Here’s What to Do If Your 401(k) Stinks

Q: My employer offers a 401(k) plan with a match. But all the funds in the plan have fees greater than 1.5%. That seems expensive. What should I do? – Jayesh Narwaney, Colorado

A: “Costs are one of the top things you should look at in a 401(k) plan,” says Mike Tedone, CPA and partner at Connecticut Wealth Management in Farmington, Conn. If your plan charges, say, an extra 1% in fees, that could reduce your retirement savings by 17% over a couple of decades.

Unfortunately, those fees are something that many workers overlook—and it’s easy to understand why. Plan costs aren’t easy to decipher, even though federal rules went into effect two years ago requiring better disclosure of 401(k) fees and investments. A National Association of Retirement Plan Participants study found that 58% of working Americans don’t realize they are even paying fees on their workplace retirement savings plans. And among those who were aware of costs, one out of four weren’t sure how much they were paying.

Here’s what you should know: Most workers pay two kinds of fees in 401(k)s. One category is the plan administration fees, which cover the paperwork and day-to-day operations. These costs might range from a few dollars to nearly $60 year, though some employers will foot this bill.

The other cost, and the biggest one, is the investment fees, which are paid to the managers of your funds. Investments fees typically aren’t covered by the employer—they are pooled together and deducted from your plan assets. You’ll see it listed in plan documents as the fund’s expense ratio.

How much does the average worker pay for a 401(k) plan? The costs, all-in, vary by plan size, but they generally range from 0.5% of assets for large company plans to 1.5% for smaller plans, says Tedone. Large plans tend to have lower fees than small plans because they can take advantage of economies of scale. So if the funds in your plan have investment fees of 1.5%—and that doesn’t include the administrative costs—your 401(k) expenses are indeed high.

To get a more specific idea of how your fees compare to other plans, you can check out BrightScope, which rates more than 50,000 401(k)s.

Unfortunately, there’s not a lot you can do to improve your 401(k) on your own. You could ask your employer to add lower-cost choices, but that isn’t likely to happen anytime soon.

That doesn’t mean you should give up on your plan, though. If your employer offers matching contributions, you should save at least enough to get the match. “That’s free money, and you don’t want to miss out on that,” says Tedone. Also, if you’re married and your spouse has a better 401(k) plan, be sure to max that out.

Meanwhile, you do have other options. First, check to see if your company offers a self-directed brokerage window, which allows you to choose your own funds. If you’re comfortable selecting your own investments, you can build a mix of lower-cost index funds or ETFs. Or you can simply opt for an inexpensive target-date fund.

If your 401(k) doesn’t offer a brokerage window, consider saving outside your plan in a traditional or Roth IRA, which will give you the freedom to pick the investments. You do face lower contribution limits in IRAs, though—up to $5,500 a year for a traditional or a Roth IRA (those 50 and older can save an additional $1,000) vs. $18,000 in a 401(k). And you must meet certain income limits to qualify for tax breaks.

At the end of day, though, it’s hard to beat your 401(k) for building retirement savings, despite the high costs. The plan allows you to put away the most money on a tax-sheltered basis. What’s more, it’s the easiest way to save, since your contributions are automatically taken out of your paycheck. “When you take all that into account, your plan isn’t as bad as you think,” says Tedone. And at some point, when you change jobs, you’ll be able to move your savings to a better 401(k) or IRA.

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How Obama Plans to Save Your Retirement

President Barack Obama speaks during the 2015 White House Conference on Aging 150714_RET_obama
Saul Loeb—Getty Images President Barack Obama speaks during the 2015 White House Conference on Aging

At a once-per-decade conference, the White House unveils an action plan some aging experts believe is ho-hum.

With Americans living longer than ever, medical experts recently updated their definition for the oldest of the old—they’re now people past the age of 90, up from 85. This group, along with retirees in general, is now firmly in the sights of government as it seeks to meet the needs of an aging population.

That message was at the heart of just about every panel discussion at Monday’s White House Conference on Aging, a once-per-decade gathering meant to “look ahead to the issues that will help shape the landscape for older Americans.” It’s a worthy topic. Longevity is changing the economic and social picture for everyone. But not all are happy with what seems like a stale approach.

Rather than focusing on things like eldercare and health problems, leaders in this area should be addressing ways to keep seniors active and “debunk the myths and stigma of aging,” Michael Hodin, executive director of the Global Council on Aging, writes in his blog.

Granted, issues surrounding caregiving and the financial exploitation of seniors must be examined. But keeping aging Americans productive—not dependent—is a challenge that calls for being proactive. Likewise, leaders need to adopt an innovative approach to education and saving. They must rethink the whole notion of retirement in a world where young people will have few safety nets, may work 60 years, and will be required to reinvent themselves over and over.

These themes weren’t missing entirely from the conference. Andy Sieg, head of global wealth and retirement solutions at Bank of America Merrill Lynch, spoke of the importance of paying off college loans and beginning to save early in life. Both of those are Millennials’ issues and by definition require taking far-sighted steps.

Robin Diamonte, chief investment officer at United Technologies, further spoke to the long-term savings issue when she said at her company “we are auto everything-ing,” a nod to the vital role that automatic enrollment of new employees in 401(k) plans and automatic escalation of contributions can play.

Still, the dominant themes of the conference focused on coping with old age and failing cognitive and general health, along with elders’ financial pressures. The best measure of a society is how it treats its older citizens, President Obama said, using the occasion to champion his legacy. Obamacare has extended the solvency of the Medicare trust fund by 13 years and helped nine million seniors save $15 billion on prescription drugs, he said. He called out Congress for not passing a tax-advantaged federal savings program for workers not eligible for an employer sponsored plan—the “auto IRA”. And he promised that by year-end he would roll out “a path for states” to offer such plans.

Also on Obama’s priority list are programs to educate prosecutors about elder abuse, upgrade nursing home facilities and promote flexible work schedules for family members who are caregivers. Health and Human Services Secretary Sylvia Burwell announced $35.7 million of funding for “geriatric workforce training” to raise the quality of both family and paid caregiving.

Pointing up the critical role that private employers must play in solving longevity issues, Sieg announced that Merrill Lynch would begin working with benefits and human resources professionals at 35,000 companies, offering up the latest gerontology research around continued employment and other retiree issues. Merrill is believed to be the only major bank with an executive gerontologist on staff.

A panel on financial security noted that the biggest obstacles to a secure retirement for all include expanding the popular concept of retirement to include productive engagement, getting people to save early, and finding ways to convert lifetime savings into lifetime income with easy low-fee annuities. These, at least, are proactive ideas—and that’s where the real solutions lie.

Read next: Here’s What You Can Really Expect from Social Security

MONEY Ask the Expert

Can Debt Collectors Go After My Retirement Savings in Court?

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My wife retired late last year and we are thinking about rolling some of her 401(k) assets into an IRA account. We live in California and understand that the protections from creditors and in bankruptcy vary. Does this move make sense for us? —Max Liu

A: There are a lot of good reasons to roll money from a 401(k) plan into an IRA after retiring. In an IRA, you have greater control over your assets. You can own individual stocks, ETFs, or even real estate, and not be bound to the often-limited menu of investment options in your company’s plan. Since you are not working any longer, there is no concern over getting an employer match. If the fees seem high or you just don’t like maneuvering the plan’s website, a rollover may make sense.

But you are right to consider protection from creditors. In general, all assets inside a 401(k) plan are out of reach of creditors, both inside or outside of bankruptcy. That’s often true of 401(k) assets rolled into an IRA, as well—though you may be required to prove that those assets came from a 401(k). For that reason, never co-mingle rolled over assets with those from a self-funded IRA, says Howard Rosen, an asset protection attorney in Miami, Fla. He advises opening a new account for the roll over.

Federal law sets these protections. But through local bankruptcy code, 33 states have put their own spin on the rules—and California is one of those. “You need to understand that when you move assets from a 401(k) plan to an IRA, you are moving from full protection to limited protection,” says Jeffrey Verdon, an asset protection attorney in Newport Beach, Calif.

States like Texas and Florida make virtually no distinction between assets in a 401(k) and those rolled into an IRA, he says. Assets are fully protected from creditors in both types of retirement account. Further, in such states the distributions from such accounts are also protected.

But in California, creditors may come after any IRA assets not deemed necessary for living expenses. They may also come after any distributions you take from your IRA. You can protect up to $1.25 million through bankruptcy, a figure that resets every three years to account for inflation. But that is a total for all IRA assets, not each account, says Cyrus Amini, a financial adviser at Charlesworth and Rugg in Woodland Hills, Calif. And note, too, that a critical ruling last year determined that inherited IRAs are no longer protected.

To understand IRA protections in other states, you may need to speak with the office of the state securities commissioner or state attorney. Many of the state rules have been shaped through case law, and so you may want to consult a private attorney, says Amini. Another good starting point is the legal sites and

MONEY Ask the Expert

Why a High Income Can Make It Harder to Save for Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My employer’s 401(k) plan considers me a “highly compensated” employee and caps my contribution at a measly 5%. I know I am not saving enough for retirement. What are the best options to maximize my retirement savings? I earn $135,000 a year and my wife makes $53,000. – E.O., Long Island, NY

A: It’s great to have a six-figure income. But, ironically, under IRS rules, being a highly compensated worker can make it harder to save in your 401(k).

First, some background on what it means to be highly compensated. The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer’s company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.

As an HCE, you’re in a different category. Uncle Sam doesn’t want the tax breaks offered by 401(k)s only to be enjoyed by top executives. So your contributions can be limited if not enough lower-paid workers contribute to the plan. The IRS conducts annual “non-discrimination” tests to make sure high earners aren’t contributing disproportionately more. In your case, it means you can put away only about $6,000 into your plan.

Granted, $120,000, or $135,00, is far from a CEO-level salary these days. And if you live in a high-cost area like New York City, your income is probably stretched. Being limited by your 401(k) only makes it more difficult to build financial security.

There are ways around your company’s plan limits, though neither is easy or, frankly, realistic, says Craig Eissler, a certified financial planner with Halbert Hargrove in Houston. Your company could set up what it known as a safe harbor plan, which would allow them to sidestep the IRS rules, but that would mean getting your employer to kick in more money for contributions. Or you could lobby your lower-paid co-workers to contribute more to the plan, which would allow higher-paid employees to save more too. Not too likely.

Better to focus on other options for pumping up your retirement savings, says Eissler. For starters, the highly compensated limits don’t apply to catch-up contributions, so if you are over 50, you can put another $6,000 a year in your 401(k). Also, if your wife is eligible for a 401(k) or other retirement savings plan through her employer, she should max it out. If she doesn’t have a 401(k), she can contribute to a deductible IRA and get a tax break—for 2015, she can contribute as much as $5,500, or $6,500 if she is over 50.

You can also contribute to an IRA, though you don’t qualify for a full tax deduction. That’s because you have a 401(k) and a combined income of $188,000. Couples who have more than $118,000 a year in modified adjusted gross income and at least one spouse with an employer retirement plan aren’t eligible for the tax break.

Instead, consider opting for a Roth IRA, says Eissler. In a Roth, you contribute after-tax dollars, but your money will grow tax-free; withdrawals will also be tax-free if the money is kept invested for five years (withdrawals of contributions are always tax-free). Unfortunately, you bump up against the income limits for contributing to a Roth. If you earn more than $183,000 as a married couple, you can’t contribute the entire $5,500. Your eligibility for how much you can contribute phases out up to $193,000, so you can make a partial contribution. The IRS has guidelines on how to calculate the reduced amount.

You can also make a nondeductible contribution to a traditional IRA, put it in cash, and then convert it to a Roth—a strategy commonly referred to as a “backdoor Roth.” This move would cost you little or nothing in taxes, if you have no other IRAs. But if you do, better think twice, since those assets would be counted as part of your tax bill. (For more details see here and here.) There are pros and cons to the conversion decision, and so it may be worthwhile to consult an accountant or adviser before making this move.

Another strategy for boosting savings is to put money into a Health Savings Account, if your company offers one. Tied to high-deductible health insurance plans, HSAs let you stash away money tax free—you can contribute up to $3,350 if you have individual health coverage or up to $6,650 if you’re on a family plan. The money grows tax-free, and the funds can be withdrawn tax-free for medical expenses. Just as with a 401(k), if you leave your company, you can take the money with you. “So many people are worried about paying for health care costs when they retire,” says Ross Langley, a certified public accountant at Halbert Hargrove. “This is a smart move.”

Once you exhaust your tax-friendly retirement options, you can save in a taxable brokerage account, says Langley. Focus on tax-efficient investments such as buy-and-hold stock funds or index funds—you’ll probably be taxed at a 15% capital gains rate, which will be lower than your income tax rate. Fixed-income investments, such as bonds, which throw off interest income, should stay in your 401(k) or IRA.

Do you have a personal finance question for our experts? Write to

Read next: Why Regular Retirement Saving Can Improve Your Health

MONEY retirement planning

3 Ways to Build a $1 Million Nest Egg Despite Lower Investment Returns

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Whether your retirement goal is six figures or seven figures, it's harder to achieve in today's market—unless you have a plan.

A new Transamerica Center for Retirement Studies survey found that $1 million is the median savings balance people estimate they’ll need for retirement. And many savers have been able to reach or exceed that goal, according a report last year by the Government Accountability Office showing that some 630,000 IRA account owners have balances greater than $1 million.

But most of these people accumulated those hefty sums in an era of generous investment returns. Between 1926 and 2014, large-company stocks gained an annualized 10.1%, while intermediate-term government bond returned 5.3% annually, according to the 2015 Ibbotson Classic Yearbook. During the go-go ’90s annualized gains were even higher—18.2% for stocks and 7.2% for bonds. Today, however, forecasts like the one from ETF guru Rick Ferri call for much lower gains, say, 7% annualized for stocks and 4% or so for bonds. Which makes building a seven-figure nest egg more of a challenge.

Still, the goal remains doable, if you go about it the right way. Here are three steps that can increase your chances of pulling it off.

1. Get in the game as early as possible—and stay in as long as you can. The more years you save and invest for retirement, the better your chances of building a big nest egg. Here’s an example. If you’re 25, earn $40,000 a year, receive annual raises of 2% during your career and earn 5% a year after expenses on your savings—a not-too-ambitious return for a diversified portfolio of stocks and bonds—you can accumulate a $1 million account balance by age 65 by saving a bit more than 15% of salary each year. That’s pretty much in line with the recommendation in the Boston College Center For Retirement Research’s “How Much Should People Save?” study.

Procrastinate even a bit, however, and it becomes much tougher to hit seven figures. Start at 30 instead of 25, and the annual savings burden jumps to nearly 20%, a much more challenging figure. Hold off until age 35, and you’ve got to sock away more a far more daunting 24% a year.

Of course, for a variety of reasons many of us don’t get as early a start as we’d like. In that case, you may be able to mitigate the savings task somewhat by tacking on extra years of saving and investing at the other end by postponing retirement. For example, if our hypothetical 25-year-old puts off saving until age 40, he’d have to sock away more than 30% a year to retire at 65 with $1 million. That would require a heroic saving effort. But if he saved and invested another five years instead of retiring, he could hit the $1 million mark by socking away about 22% annually—still daunting, yes, but not nearly as much as 30%. What’s more, even if he fell short of $1 million, those extra years of work would significantly boost his Social Security benefit and he could safely draw more money from his nest egg since it wouldn’t have to last as long.

2. Leverage every saving advantage you can. The most obvious way to do this is to make the most of employer matching funds, assuming your 401(k) offers them, as most do. Although many plans are more generous, the most common matching formula is 50 cents per dollar contributed up to 6% of pay for a 3% maximum match. That would bring the required savings figure to get to $1 million by 65 down a manageable 16% or so for our fictive 25-year-old, even if he delayed saving a cent until age 30. Alas, a new Financial Engines report finds that the typical 401(k) participant misses out on $1,336 in matching funds each year.

There are plenty of other ways to bulk up your nest egg. Even if you’re covered by a 401(k) or other retirement plan, chances are you’re also eligible to contribute to some type of IRA. (See Morningstar’s IRA calculator.) Ideally, you’ll shoot for the maximum ($5,500 this year; $6,500 if you’re 50 or older), but even smaller amounts can add up. For example, invest $3,000 a year between the ages of 25 and 50 and you’ll have just over $312,000 at 65 even if you never throw in another cent, assuming a 5% annual return.

If you’ve maxed out contributions to tax-advantaged accounts like 401(k)s and IRAs, you can boost after-tax returns in taxable accounts by focusing on tax-efficient investments, such as index funds, ETFs and tax-managed funds, that minimize the portion of your return that goes to the IRS. Clicking on the “Tax” tab in any fund’s Morningstar page will show you how much of its return a fund gives up to taxes; this Morningstar article offers three different tax-efficient portfolios for retirement savers.

3. Pare investment costs to the bone. You can’t force the financial markets to deliver a higher rate of return, but you can keep more of whatever return the market delivers by sticking to low-cost investing options like broad-based index funds and ETFs. According to a recent Morningstar fee study, the average asset-weighted expense ratio for index funds and ETFs was roughly 0.20% compared with 0.80% for actively managed mutual funds. While there’s no assurance that every dollar you save in expenses equals an extra dollar of return, low-expense funds to tend to outperform their high-expense counterparts.

So, for example, if instead of paying 1% a year in investment expenses, the 25-year-old in the example above pays 0.25%—which is doable with a portfolio of index funds and ETFs—that could boost his annual return from 5% to 5.75%, in which case he’d need to save just 13% of pay instead of 15% to build a $1 million nest egg by age 65, if he starts saving at age 25—or just under 22% instead of 24%, if he procrastinates for 10 years. In short, parting investment expenses is the equivalent of saving a higher percentage of pay without actually having to reduce what you spend.

People can disagree about whether $1 million is a legitimate target. Clearly, many retirees will need less, others will require more. But whether you’ve set $1 million as a target or you just want to build the largest nest egg you can, following the three guidelines will increase your chances of achieving your goal, and improve your prospects for a secure retirement.

Walter Updegrave is the editor of If you have a question on retirement or investing that you would like Walter to answer online, send it to him at

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