For those of you who missed the April Recap, you can read it by clicking here.

It has been several months since this newsletter has discussed a personal finance topic – for newer readers, the last one was an evaluation of whether to invest or pay down debt.  A natural progression from that topic is to understand the best places to invest for retirement.

The most important variables in selecting the appropriate retirement savings vehicle include:

  * Your current tax bracket as well as your expected tax bracket at retirement.

  * Your income level.

  * The amount you have available to invest.

  * The likelihood you will tap retirement assets prior to retiring.

  * Your 401(k) options and costs.

With so many variables, it’s easy to make poor decisions, and some people may get so overwhelmed that they put off saving all together.  To simplify the process, it helps to think of the options as a series of buckets: once the first bucket is filled, you then fill the second, then the third, and so.  Although everyone has different circumstances, I’d generally recommend “filling your buckets” in this order:

Bucket #1: Invest enough in your company retirement plan to earn a match. 

If your employer offers a match on some portion of your 401(k) contributions, invest at least that much because otherwise you are leaving free money on the table.  For example, if your employer has a 3% match and you make $100,000 a year, you’ll need to contribute at least $3,000 of your own money to your 401(k) to be entitled to your employer’s full matching contribution. 

If you’re not earning matching contributions on investments in your company retirement plan or still have money to invest once you’re investing enough to meet the match, then move on to the next bucket.

Bucket #2: Invest in IRA (Roth or deductible) or Roth 401(k).

This bucket will vary depending on one of the variables in the bullet points above.  If you are eligible for a Roth IRA or your company has a Roth 401(k) option, then this is the next best bucket to fill.  For most people that are not near retirement, the flexibility and tax-advantages make the Roth a no-brainer.  If you can’t invest in a Roth account, the next best option is to make contributions to a traditional IRA, so long as you are able to deduct the contributions from your income.

A detailed analysis of IRA options is an important topic on its own, so we will focus on that next week.

Bucket #3: Invest the maximum allowable amount in your company retirement plan.

Once buckets one and two are full, it’s time to max-out your company’s retirement plan.  In addition, your age may allow you to contribute more than the regular limits.  For example, 401(k) investors over 50 can contribute up to $22,000 compared to the regular limit of $16,500.  And don’t forget to consider a Roth 401(k) if it is available to you – this was mentioned in the last bucket, but it’s important enough to repeat!

Bucket #4: Invest in traditional nondeductible IRA.

Yes, another IRA – again, we will get down to the nitty gritty details on different IRAs next week.  With the traditional nondeductible IRA, there is no tax break for the money when it goes in during your working years or out during your retirement.  You will, however, enjoy the benefit of tax-deferred growth.

For some investors, opening a traditional nondeductible IRA this year is advantageous because any investors, regardless of their income, are able to convert traditional IRAs to Roth IRAs in 2010.

Bucket #5: Invest in taxable account.

If you’ve reached this bucket: congratulations, you are doing a nice job of saving for your retirement.  While you’ve exhausted the best tax-advantaged options, you can always save in a taxable account.  The key here is to be very aware of the tax efficiency of any investments you select. 

Peter Lazaroff, Investment Analyst

St. Louis, MO

www.acrinv.com