MONEY IRAs

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.

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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:

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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:

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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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MONEY IRAs

Use the Backdoor Roth IRA Before It Disappears

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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.

Read next: Here’s How Much Cash You Need in Retirement

MONEY Aging

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 Nolo.com and protectyou.com.

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 AskTheExpert@moneymail.com.

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

Andy Roberts/Getty Images

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 RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY Ask the Expert

How to Get a Double Dose of Tax-Deferred Savings

Investing illustration
Robert A. Di Ieso, Jr.

Q: When I turn 70½ I’m required to start withdrawing funds from my 401(k) and pay taxes on it. I don’t need this money to live on. Is it too risky for me to invest it? – Dolores

A: What you’re referring to are required minimum distributions (RMD), which generally begin in the calendar year after you turn 70½.

Even if you can afford to keep your money parked in your retirement plans, the Internal Revenue Service insists that you start withdrawing money annually from your retirement accounts once you reach a certain age.

“It typically starts at 3% to 4% of the value of your account and goes up from there,” says Gretchen Cliburn, a certified financial planner with BKD Wealth Advisors headquartered in Springfield, Mo. You can estimate your RMD using a worksheet from the IRS.

Fail to withdraw the minimum and you’ll face a hefty penalty – 50% on the amount that should have been withdrawn, plus regular income taxes.

“Where things can get confusing is if you have multiple accounts,” says Cliburn. “I recommend consolidating accounts so you avoid missing an RMD.”

To add to the confusion, you can take your first distribution the year you turn 70½, or postpone it until April 1 the following calendar year – though you’ll need to take double the distributions that year. Likewise, if you’re still working, you’ll need to take RMDs on your IRAs, but you can delay taking distributions on your 401(k) or other employer-sponsored plan until the year after you retire.

Now, what should you do with that distribution?

“The answer really depends on your situation and your goals for that money,” says Cliburn. “Will you use it to support your lifestyle over the next 10 or 20 years, or do you want it to go to future generations?”

“If you want to hang onto those funds, your best bet is to open a taxable investment account and divide the distributions into three buckets,” she says. One bucket can be cash; another bucket might go into a balanced mutual fund, which owns stocks and bonds; the final bucket might go to a tax-efficient exchange-traded stock fund, such as one that tracks the S&P 500.

Just how much goes into each bucket depends on your other sources of income. “If you have a guaranteed source of income, you may feel more comfortable taking on a little more risk,” says Cliburn.

If you’re absolutely certain that you won’t need these required minimum distributions to live on — and that you have other funds to cover your retirement living expenses — then you could use the distributions to help others, and possibly get some tax savings.

You need earned income to contribute to a Roth IRA. But you could, for example, help your children fund a Roth IRA (assuming they qualify). You can gift any individual up to $14,000 a year before you have to file a gift tax return. They’ll make after-tax contributions to the Roth, but the money will grow tax-deferred. Withdrawals of principal are tax-free — provided the account has been open at least five years — and all withdrawals are tax free after the account holder turns 59½.

Another option is to open or contribute to a 529 college savings plan. The money grows tax-deferred and withdrawals for qualified education expenses are exempt from federal and state tax. Depending on where you or your children live, there may be a state tax deduction to boot.

A tax-free charitable transfer is another possibility, though you’ll need to wait to see if so-called qualified charitable contributions, or QCDs, are renewed for the 2015 tax year. Taxpayers didn’t hear about last year’s renewal until December.

Assuming it’s a go, it’s a sweet deal. Last year, IRA owners age 70½ or over were able to directly transfer up to $100,000 per year from their accounts to eligible charities, sans tax.

MONEY Ask the Expert

How to Save For Retirement When You Don’t Have a 401(k)

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

Q: The company I work for doesn’t offer a 401(k). I am young professional who wants to start saving for retirement but I don’t have a lot of money. Where should I start? – Abraham Weiser, New York City

A: Millions of workers are in the same boat. One-quarter of full-time employees are at companies that don’t offer a retirement plan, according to government data. The situation is most common at small firms: Only 50% of workers at companies with fewer than 100 employees have 401(k)s vs. 82% of workers at medium and large companies.

Certainly, 401(k)s are one of the best ways to save for retirement. These plans let you make contributions directly from your paycheck, and you can put away a large amount ($18,000 in 2015 for those 49 and younger), which can grow tax sheltered.

But there are retirement savings options beyond the 401(k) that also offer attractive tax benefits, says Ryan P. Tuttle, a certified financial planner at Connecticut Wealth Management in Farmington, Ct.

Since you’re just getting started, your first step is to get a handle on your spending and cash flow, which will help you determine how much you can really afford to put away for retirement. If you have a lot of high-rate debt—say, student loans or credit cards—you should also be paying that down. But if you have to divert cash to pay off loans, you won’t be able to put away a lot for savings.

That doesn’t mean you should wait to put money away for retirement. Even if you can only save a small amount, perhaps $50 or $100 a week, do it now. The earlier you get going, the more time that money will have to compound, so even a few dollars here or there can make a big difference in two or three decades.

You can give an even bigger boost to your savings by opting for a tax-sheltered savings plan like an Individual Retirement Account (IRA), which protects your gains from Uncle Sam, at least temporarily.

These come in two flavors: traditional IRAs and Roth IRAs. In a traditional IRA, you pay taxes when you withdraw the money in retirement. Depending on your income, you may also qualify for a tax deduction on your IRA contribution. With a Roth IRA, it’s the opposite. You put in money after paying taxes but you can withdraw it tax free once you retire.

The downside to IRAs is that you can only stash $5,500 away each year, for those 49 and younger. And to make a full contribution to a Roth, your modified adjusted gross income must be less than $131,000 a year if you’re single or $193,000 for those married filing jointly.

If your pay doesn’t exceed the income limit, a Roth IRA is your best option, says Tuttle. When you’re young and your income is low, your tax rate will be lower. So the upfront tax break you get with a traditional IRA isn’t as big of a deal.

Ideally, you’ll contribute the maximum $5,500 to your IRA. But if you don’t have a chunk of money like that, have funds regularly transferred from your bank account to an IRA until you reach the $5,500. You can set up an IRA account easily with a low-fee provider such as Vanguard, Fidelity or T. Rowe Price.

Choose low-cost investments such as index funds and exchange-traded funds (ETFs); you can find choices on our Money 50 list of recommended funds and ETFs. Most younger investors will do best with a heavier concentration in stocks than bonds, since you’ll want growth and you have time to ride out market downturns. Still, your asset allocation should be geared to your individual risk tolerance.

If you end up maxing out your IRA, you can stash more money in a taxable account. Look for tax-efficient investments that generate little or no taxable gains—index funds and ETFs, again, may fill the bill.

Getting an early start in retirement savings is smart. But you should also be investing in your human capital. That means continuing to get education and adding to your skills so your earnings rise over time. Your earnings grow most quickly in those first decades of your career. “The more you earn, the more you can put away for retirement,” says Tuttle. As you move on to better opportunities—with any luck—you’ll land at a company that offers a great 401(k) plan, too.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Quick Guide to How Much You Need to Retire

MONEY retirement planning

Answer These 10 Questions to See If You’re on Track to Retirement

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More Americans are confident about retirement—maybe too confident. Here's how to give your expectations a timely reality check.

The good news: The Employee Benefit Research Institute’s 2015 Retirement Confidence Survey says workers and retirees are more confident about affording retirement. The bad news: The survey also says there’s little sign they’re doing enough to achieve that goal. To see whether you’re taking the necessary steps for a secure retirement, answer the 10 questions below.

1. Have you set a savings target? No, I don’t mean a long-term goal like have a $1 million nest egg by age 65. I mean a short-term target like saving a specific dollar amount or percentage of your salary each year. You’ll be more likely to save if you have such a goal and you’ll have a better sense of whether you’re making progress toward a secure retirement. Saving 15% of salary—the figure cited in a recent Boston College Center for Retirement Research Study—is a good target. If you can’t manage that, start at 10% and increase your savings level by one percentage point a year, or go to the Will You Have Enough To Retire tool to see how you’ll fare with different rates.

2. Are you making the most of tax-advantaged savings plans? At the very least, you should be contributing enough to take full advantage of any matching funds your 401(k) or other workplace plan offers. If you’re maxing out your plan at work and have still more money you can save, you may also be able to save in other tax-advantaged plans, like a traditional IRA or Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible and, if so, how much you can contribute.) Able to sock away even more? Consider tax-efficient options like broad index funds, ETFs and tax-managed funds within taxable accounts.

3. Have you gauged your risk tolerance? You can’t set an effective retirement investing strategy unless you’ve done a gut check—that is, assessed your true risk tolerance. Otherwise, you run the risk of doing what what many investors do—investing too aggressively when the market’s doing well (and selling in a panic when it drops) and too conservatively after stock prices have plummeted (and missing the big gains when the market inevitably rebounds). You can get a good sense of your true appetite for risk within a few minutes by completing this Risk Tolerance Questionnaire-Asset Allocation tool.

4. Do you have the right stocks-bonds mix? Most investors focus their attention on picking specific investments—the top-performing fund or ETF, a high-flying stock, etc. Big mistake. The real driver of long-term investing success is your asset allocation, or how you divvy up your savings between stocks and bonds. Generally, the younger you are and the more risk you’re willing to handle, the more of your savings you want to devote to stocks. The older you are and the less willing you are to see your savings suffer setbacks during market downturns, the more of your savings you want to stash in bonds. The risk tolerance questionnaire mentioned above will suggest a stocks-bonds mix based on your appetite for risk and time horizon (how long you plan to keep your money invested). You can also get an idea of how you should be allocating your portfolio between stocks and bonds by checking out the Vanguard Target Retirement Fund for someone your age.

5. Do you have the right investments? You can easily get the impression you’re some sort of slacker if you’re not loading up your retirement portfolio with all manner of funds, ETFs and other investments that cover every obscure corner of the financial markets. Nonsense. Diversification is important, but you can go too far. You can “di-worse-ify” and end up with an expensive, unwieldy and unworkable smorgasbord of investments. A better strategy: focus on plain-vanilla index funds and ETFs that give you broad exposure to stocks and bonds at a low cost. That approach always makes sense, but it’s especially important to diversify broadly and hold costs down given the projections for lower-than-normal investment returns in the years ahead.

6. Have you assessed where you stand? Once you’ve answered the previous questions, it’s important that you establish a baseline—that is, see whether you’ll be on track toward a secure retirement if you continue along the saving and investing path you’ve set. Fortunately, it’s relatively easy to do this sort of evaluation. Just go to a retirement income calculator that uses Monte Carlo analysis to do its projections, enter such information as your age, salary, savings rate, how much you already have tucked away in retirement accounts, your stocks-bonds mix and the percentage of pre-retirement income you’ll need after you retire retirement (70% to 80% is a good starting estimate) and the calculator will estimate the probability that you’ll be able to retire given how much you’re saving and how you’re investing. If you’re already retired, the calculator will give you the probability that Social Security, your savings and any other resources will be able to generate the retirement income you’ll need. Ideally, you want a probability of 80% or higher. But if it comes in lower, you can make adjustments such as saving more, spending less, retiring later, etc. to improve your chances. And, in fact, you should go through this assessment every year or so just to see if you do need to tweak your planning.

7. Have you done any “lifestyle planning”? Finances are important, but planning for retirement isn’t just about the bucks. You also want to take time to think seriously about how you’ll actually live in retirement. Among the questions: Will you stay in your current home, downsize or perhaps even relocate to an area with lower living costs? Do you have enough activities—hobbies, volunteering, perhaps a part-time job—to keep you busy and engaged once you no longer have the nine-to-five routine to provide a framework for most days? Do you have plenty of friends, relatives and former co-workers you can turn to for companionship and support. Research shows that people who have a solid social network tend to be happier in retirement (the same, by the way, is true for retirees who have more frequent sex). Obviously, this is an area where your personal preferences are paramount. But seminars for pre-retirees like the Paths To Creative Retirement workshops at the University of North Carolina at Asheville and tools like Ready-2-Retire can help you better focus on lifestyle issues so can ultimately integrate them into your financial planning.

8. Have you checked out your Social Security options? Although many retirees may not think of it that way, the inflation-adjusted lifetime payments Social Security provides are one of their biggest financial assets, if not the biggest. Which is why it’s crucial that a good five to 10 years before you retire, you seriously consider when to claim Social Security and, if you’re married, how best to coordinate benefits with your spouse. Advance planning can make a big difference. For each year you delay taking benefits between age 62 and 70, you can boost your monthly payment by roughly 7% to 8%. And by taking advantage of different claiming strategies, married couples may be able to increase their lifetime benefit by several hundred thousand dollars. You’ll find more tips on how to get the most out of Social Security in Boston University economist and Social Security expert Larry Kotlikoff’s new Social Security Q&A column on RealDealRetirement.com.

9. Do you have a Plan B? Sometimes even the best planning can go awry. Indeed, two-thirds of Americans said their retirement planning has been disrupted by such things as major health bills, spates of unemployment, business setbacks or divorce, according to a a recent TD Ameritrade survey. Which is why it’s crucial that you consider what might go wrong ahead of time, and come up with ways to respond so you can mitigate the damage and recover from setbacks more quickly. Along the same lines, it’s also a good idea to periodically crash-test your retirement plan. Knowing how your nest egg might fare during a severe market downturn and what that mean for your retirement prospects can help prevent you from freaking out during periods of financial stress and better formulate a way to get back on track.

10. Do You Need Help? If you’re comfortable flying solo with your retirement planning, that’s great. But if you think you could do with some assistance—whether on an ongoing basis or with a specific issue—then it makes sense to seek guidance. The key, though, is finding an adviser who’s competent, honest and willing to provide that advice at a reasonable price. The Department of Labor recently released a proposal designed to better protect investors from advisers’ conflicts of interest. We’ll have to see how that works out. In the meantime, though, you can increase your chances of getting good affordable advice by following these four tips and asking these five questions.

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

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