YOUNG INVESTOR CONUNDRUM: IRA vs. 401(k)

Retirement was simpler when all you had to do was put in your time at work, retire and collect your check. Between the company pension and Social Security, most retirees figured they had it made. And if they'd managed to save a little extra, it was gravy.

These days, that's all changed and today's younger investors have some choices to make. Traditional defined-benefit pension plans have become a thing of the past for most workers. And few people seriously expect Social Security to provide the majority of what they hope to spend in retirement.

In short, our ability to save and invest on our own will likely determine whether we realize the retirement of our dreams -- or just hope to get by somehow when we're no longer able to work for a living.

GETTING STARTED

Recognizing the need to save for retirement is the first step. That's followed by prudent retirement planning, which includes figuring out when you'd like to retire, how much you'd like to spend in retirement, and how much you need to save and invest now to get there.

After all that, you might think your next step would simply be to start saving. But with all the different retirement accounts out there -- 401(k), 403(b) or 457 plans at work, traditional IRAs, Roth IRAs, regular brokerage accounts, deferred annuities -- it can be hard to know which are best for you, and in what combination.

RETIREMENT WORKHORSES: IRAS AND 401(K)S

Your main workhorses for retirement savings will likely be an IRA along with a 401(k), 403(b), 457 or other qualified employer plan, depending on what your workplace offers.

If you have earned income but your employer doesn't offer a retirement plan, you can always start by putting money in a traditional IRA or Roth IRA. But if you also have access to a 401(k) or other employer plan, should you fund your 401(k), your IRA or both?

The best choice is to fund your tax-advantage options to the fullest (as shown in the table) if you're eligible, then move on to other ways to save for retirement if you're able (more below). But what if you can't afford to save that much?

ANNUAL CONTRIBUTION LIMITS

401(k), 403(b), 457 or other qualified employer plan

                            Contribution          50 or older catch-up

2007                        $15,500               $5,000

Traditional IRA and Roth IRA

                            Contribution          50 or older catch-up

2006                        $4,000                $1,000

2007                        $4,000                $1,000

2008                        $5,000                $1,000

*Indexed to inflation for future years.

GOT A MATCH?

If your 401(k) offers a matching contribution, that's usually the best place to start. For example, let's say you make $50,000. Your employer matches your 401(k) contributions dollar-for-dollar up to 6 percent of your salary, which for you amounts to $3,000. In this case, the first $3,000 of savings should go into your 401(k) plan. Why give up free money?

Rande Spiegelman, vice president, financial planning, Schwab Center for Financial Research

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