Even at the beginning of their career, employees should save for retirement

 

Greg Geisler, PhD, CPA
Associate Professor of Accounting

 

According to a recent study titled “Retirement Account Options When Beginning a Career” by Gregory Geisler, associate professor of accounting at the University of Missouri-St. Louis, and Jerry Stern, professor of accounting at Indiana University-Bloomington, which appeared in the May, 2014 issue of the “Journal of Financial Service Professionals” and was recently highlighted in an article in USA Today, the coauthors said there is a three-step decision-making hierarchy to follow. “This hierarchy is what will make the individual wealthiest after considering taxes,” Geisler told USA Today.

Those steps include:

1st) Contributing enough to their employer-sponsored retirement account (e.g., 401(k), 403(b)) to receive the maximum matching contribution from their employer. Some employers offer a Roth retirement account and for new employees starting their careers who plan to save throughout their careers for retirement, this is the best option. Even if your employer does not offer the Roth option, still contribute enough to your 401(k) (or 403(b)) to receive the maximum employer match.

2nd) If the new employee still has funds available to fund retirement accounts after following the first step, contribute to a Roth IRA because the investment choices available are much larger than inside an employer-sponsored retirement account. For 2014, federal tax law allows a maximum of $5,500 to be contributed by an employed individual under age 50 to their IRA accounts. The second step can be skipped if the new employee likes the investment choices available inside their employer-sponsored retirement account.

3rd) If the new employee still has funds available to fund retirement accounts, make unmatched contributions to their 401(k) (or 403(b)). Again, if the Roth 401(k) (or Roth 403(b)) option is available, that is recommended. For 2014, federal tax law allows a maximum of $17,500 to be contributed by an employee under age 50 to their 401(k) (or 403(b)) accounts, although some employer’s plans may not allow that much.

“For investments in Roth retirement accounts, regardless of whether tax rates are rising, falling or remaining constant over time, employees can depend on their annualized after-tax rates of return and future after-tax values to be unaffected by their changing marginal tax rates,” Geisler and Stern wrote in their study.