The Boston Globe

With so many choices now available for saving for
retirement - tax- deferred 401(k)s and IRAs, or stocks
and mutual funds in taxable accounts - how can a
person know what vehicle is best?

Important factors to consider are whether you want to
pay taxes now or later, and if you'll be in a higher
tax bracket, the same bracket, or a lower one in

Retirement planning specialists agree that
tax-deferred investments are one of the best ways to
build wealth. What you don't pay in taxes now will
allow the money to grow more rapidly over the
long-term than if the money were in a similar taxable

So even if you'll be taxed on your retirement
distributions from 401(k)s or IRAs at the same rate as
in your working years - say 31 percent - you'll still
do better than if you had invested the money in a
taxable stock or mutual fund account subject to a 20
percent long-term capital gains tax.

For instance, a $100 monthly before-tax investment
beginning at age 25, assuming a 7 percent annual
investment return, grows to $248,000 at age 65. But a
$100 monthly after-tax investment, assuming a 31
percent tax bracket, grows only to $142,000 in the
same scenario, according to the American Association
of Retired Persons. And if you were to pay income
taxes at the 31 percent rate on that $248,000, you'd
still be ahead of what you'd net from the $142,000
after paying a 20 percent capital gains tax.

To reach his goal of retiring by 55, Bob Mac Allister
of Shrewsbury saved as much as he could, through a
401(k) plan, IRAs, and investments in taxable

Now, four years later, the retired benefits consultant
preaches what he practiced by leading seminars,
arranged through AARP, urging people to invest as
early and as much as they can, especially through
tax-advantaged vehicles.

Because he retired early, i.e.before he qualifies for
distributions from 401(k)s and IRAs, MacAllister is
making use of his other savings, and allowing the
tax-deferred plans to continue to grow.

Joanne Remy, 65, of Canton, also has saved
aggressively through a 401(k)-type plan and IRAs, even
though she plans on working as an estate lawyer into
her 70s.

But she has seen many women, clients as well as
friends, who have saved little or nothing for
retirement, so she, too, hosts AARP workshops, to help
women take charge of their financial future.

"Women have retirement problems because they generally
earn less money to start with. They have smaller
pensions, they take time off for the kids," says Remy.

As financial planning specialists know, Social
Security will not be enough to fund a comfortable
retirement. Even people who get a traditional company
pension will probably need additional savings.

"Any time you can put money away on a tax-deductible,
tax- deferred basis, you should," says Bob Glovsky, a
certified financial planner and president of Mintz
Levin Financial Advisors in Boston.

Yet, 20 percent of people who are eligible for 401(k)s
do not participate, according to national estimates.
About 30 percent of Americans have no retirement plan
through work at all - neither a traditional company
pension nor a 401(k) - according to Remy.
No wonder so many people find themselves retiring with
insufficient funds.

Mac Allister and Remy tell those who attend their
workshops to begin saving early - in their 20s and 30s
if possible - even if it's a few dollars a week.
"Start now and try to build it," says MacAllister.
Ultimately, try to "save 10, 15, 20 percent of
income." Just bringing your lunch to work rather than
buying it should help you save enough to fund an IRA
at $2,000 a year, says Remy.


If your employer provides a company match for your
401(k), you should contribute at least enough to take
advantage of that. "Otherwise, you're throwing money
away," says Remy.

If you can afford it, and your 401(k) plan allows it,
contribute the maximum allowed under federal law,
$10,500 this year. You get to deduct that contribution
from your income for state and federal tax purposes,
although you will pay Social Security taxes on it. The
money compounds and grows tax-deferred.

Don't make the mistake of investing too conservatively
in your 401(k), even as you approach retirement, or of
taking any funds out of the plan as soon as you're
eligible. "You're still better off having the
compounding," says Glovsky. "Defer, defer as long as
you can."

While you are eligible to take regular retirement
distributions from a 401(k) at 59 1/2, Glovsky
recommends using non-tax-deferred assets first and
allowing the 401(k) to continue growing until the
mandatory distribution age of 70, if possible.

"Just because you're retiring doesn't mean you should
take money out of the retirement plan," says Glovsky.
"Use money from nonretirement assets first."

When it comes time to take distributions from 401(k)s,
the money will be taxed as regular income, not at the
more favorable long-term capital gains rate, but the
advantages of long-term tax-deferral through a 401(k),
and the possibility of your being in a lower income
tax bracket at retirement, "balances it out," says
David Wray, president of the Profit Sharing/401(k)
Council of America.

However, if you own company stock through your 401(k),
there is special tax treatment if you have the stock
distributed separately into your own brokerage account
after retirement, according to Wray. You will pay
regular income tax rates only on the original cost to
you for buying the stock. When you sell the shares,
you will pay long-term capital gains on the difference
between the selling price and the purchase price, says


If your employer doesn't offer a 401(k), try to
contribute the maximum $2,000 allowed a year into an
IRA. While you deduct the IRA amount from your taxable
income now, you pay income tax upon withdrawal when
you retire.

If you don't qualify because you already participate
in a 401(k), contribute the maximum $2,000 allowed
into a nondeductible Roth IRA. While you don't get to
deduct the Roth IRA amount from your taxable income
now, you can withdraw the money tax-free at

Some financial planning specialists say that despite
the fanfare surrounding the creation of the Roth IRA,
the tax-free nature of withdrawals are an advantage
only if your tax bracket is higher in retirement.

"I did the math on the Roth IRA and I was shocked,"
says Ted Benna, president of the 401(k) Association in
Pennsylvania. "If your tax bracket is the same when
you take it out, there's no advantage."

There are some other advantages to a Roth, however.
You can withdraw the money before age 59 1/2 without a
10 percent early withdrawal penalty, and you do not
have to take mandatory distributions at age 70, as
required in a traditional IRA.