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Where Should You Consider Saving?

From Fidelity.com

When creating a savings plan it's important to determine how much to save. It's also important to make sure you put your savings in the "right" accounts. There is no one-size-fits-all solution for every investor, but the following guidelines for investing in tax-advantaged retirement savings vehicles, based largely on tax efficiency, may help you determine a strategy for your own retirement savings. Keep in mind, however, there are other factors to consider such as range and type of investment choices, fees, and access to investments. We encourage you to consider consulting a tax and/or financial adviser when evaluating your options and to evaluate and update your retirement strategy at least annually.

where to save for retirement

1. Maximize Employer-Matched Contributions

If you or your spouse is eligible for a workplace retirement plan, your first priority should be to strongly consider contributing the full amount required to receive the maximum employer-match offered by the plan. Some plans may match 100% of what you put in — that's like getting an instant 100% return on your investment. Not only that, but pretax contributions to such plans should not be subject to current income taxes, and any earnings within the account grow tax-deferred*.

* Pretax contributions and earnings are subject to income taxes when withdrawn and may also be subject to a 10% penalty if taken before age 59½.

2. Consider Primary Tax-Advantaged Accounts

Second, consider unmatched pretax contributions to workplace retirement plans, after-tax contributions to Roth IRAs (or Roth 401(k)s starting in 2006), or deductible contributions to Traditional IRAs.

The account that may be best for you will depend on, among other things, the types of contributions you are eligible to make, contribution limits, and whether you believe your income tax rate will be higher or lower in retirement than now.

  • If you expect your income tax rate to be lower in retirement, your best option may be a pretax contribution to a workplace retirement plan or a deductible contribution to a Traditional IRA.
  • If you expect your income tax rate to be higher in retirement, your best option among these choices may be after-tax contributions to a Roth 401(k) or Roth IRA since earnings should be income tax-free provided certain conditions are met.
  • If you expect your income tax rate will be the same in retirement, all these choices are roughly on par with one another from a tax perspective.

Remember that once you reach age 50, catch-up provisions may allow you to save even more in your employer-sponsored plan or IRA.

3. Consider Other Tax-Advantaged Options

Finally, consider after-tax contributions to your workplace retirement plan (other than a Roth 401(k), which falls under 1 and 2 above), non-deductible contributions to a Traditional IRA, or a tax-deferred annuity purchased with after-tax dollars.

Note: Taxable accounts also play an important role in any retirement savings plan. How you would prioritize them in relation to tax-advantaged accounts largely depends on the tax efficiency of investments within the account and how long you plan to hold the investments before selling.

Tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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