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Need Help Choosing the Right Tax Free Retirement Account?

Tax Free Retirement Accounts Have Different Advantages

With all the different options available it can be hard to know which tax-free retirement account you should invest in. Here are some simple guidelines that we suggest.

401K Plan

Always put the maximum into your 401K plan that your company will match. If your company matches up to 5%, put 5% in your account. If they match 50% up to 10%, then put 10% into your 401K account each month. Matched money in your 401K is the same as free money. You never want to avoid putting the maximum matched amount, even if you can't afford the deduction. Find a way!


The only advantage of a traditional IRA is that it's not taxable in the year you invest in it. However, you need to pay taxes when you sell it. And if you do well, those taxes can be very burdensome. We recommend that you invest in a Roth IRA in almost every case, rather than a traditional IRA.

Roth IRA

A Roth IRA is not taxable when you sell it. And although it does not give you a tax break the year you invest in it, your money will compound over the years and you will not be taxed when you sell it. This is the best way to save for your retirement because you can invest thousands when you are younger, and have hundreds of thousands in tax free spending when you retire.

Coverdell IRA

If you are investing for someone's education, we recommend that you invest in a Coverdell IRA. Coverdell money can be withdrawn tax free to cover almost any kind of educational expense, including private high schools and elementary schools. More importantly, if the beneficiary you choose decides not to go to school, you can get the money back without a penalty, or change the beneficiary to another child. Both of these flexible options are not available with the 529 plans.

529 Plan

If you're investing for someone's education and you are positive that they will attend college, then this could be the choice for you. Although less flexible than the Coverdell IRA, this account can provide additional tax benefits as compared to the Coverdell. However, it can only be used for college, the beneficiary can't be changed, and not all schools are covered. To keep your options open, we recommend you open a Coverdell IRA.

See Also:  Other Retirement Information