What are the best vehicles for retirement investing for a combination of salaried, self-employed, and pension?

Question

I'm retiring from the military after 20 years and moving on to a second career (still about 20 years from ultimate retirement), and looking for the best plan for accumulating retirement funds. I expect to have considerably more income than my current standard of living and would like to invest the maximum possible in IRAs and similar vehicles with tax advantages.

I am married (wife is not employed outside the home) and will have three sources of income next year: my primary job will be salaried at $90K/year including an employer-matched (to 6% of salary) 401K plan; I'll have a $60K/year self-employed consulting contract (potential for Keogh?), and I'll receive $40K/year military retirement pension (unearned income). The sum AGI puts me over the limit for contributing to Roth IRAs, but I'm confused as to whether the 401K, Traditional IRA (for self and wife), or a Keogh plan are better, or can be used simultaneously. Assuming lots of $$$ to invest, where should I throw my money?

Answer 1

Invest at least the 6% in your 401K since that is what they match. IRA's have pretty small contribution limits, so unless you open multiple IRA's you won't get much benefit here. I would max your investment in the 401K (after a year - usually - you can increase your investment significantly. I can put up to 22% in mine and I do). You can use them simultaneously. Rather than open a Keogh additionally (although you can certainly do so-I just think they are a hassle) you can just open an investment account with your local bank to invest in stocks similar to your 401k (if they are good ones) because since you will already be following them you can invest more with less research.

Answer 2

Tax deferral is where you should start, since your income will put you in a pretty high tax bracket. Max out the 401(k). Avoid traditional IRAs because you would probably not be able to deduct contributions. A Keogh provides tax deferral, but look carefully at how complex it would be and how much it would cost in legal and accounting fees. Keoghs are good for people who have hundreds of thousands of dollars a year in self-employment income. But, unless you have an accountant or lawyer you like a lot and want to pay significant fees to, you may be better off with a SEP-IRA or a SIMPLE IRA. These are retirement plans for the self-employed, and allow you to make larger tax deductible contributions than you could with a regular IRA. They are a bit more complex than a regular IRA, but many people can open one and operate it with the assistance of a mutual fund company (like Vanguard or Fidelity), without needing to hire an accountant or lawyer. You can contribute up to about 18% of your self-employment income per year with a SEP-IRA, and up to $10,500 of your self-employment income in 2007 with a SIMPLE IRA.

An easy place to invest your savings would be a lifecycle or target date retirement fund. These are mutual funds where your money is automatically allocated into a diversified portfolio. The investment portfolio is then gradually made more conservative as you grow older (which is what you should be doing). These funds aren't perfect for everyone, but they're a good place to start.

Answer 3

Incorporate you business and hire your wife as an employee in your consulting business. Pay her as much as you can and open a 401K for her so most of her income will be in the 401k. There is a catch up provision for her, which means you can add more to it. With a good accountant you should be able to reduce a large portion of your business taxes. If you invest in 40K of your retirement income into good mutual funds in 20 years with 9-10% compounded yield per year, plus you 401K at work you will be a multi millionaire. Look into early retirement and enjoy life.