I’m 54, retired military and get $1,500 a month after taxes and medical deductions. I also have a 457(b) account for my current government job and I have been putting $300 into it each payday. I was paying $1,000 a month toward my car but it’s about to be paid off. I’m planning to increase my 457(b) contribution to $600 per payday but I was wondering if I should put some of the money in either a high-yield savings account or an IRA?
Congratulations on paying your car off! Also, good on you for deliberately thinking about what you are going to do with the money that is freed up every month.
Your next move depends on a lot of factors, you should mainly be thinking about whether you’ll need the money: in the near term or years in the future? (If you have additional questions about your financial plan, this tool can help match you with potential advisors.)
What Is Your Goal for the Money?
You may already have a financial plan in place. If not, take some time to define your goals and prioritize them. Start by making sure you have a sufficient emergency fund, and then go down the line from there. Goal setting is a critical step because saving money in a high-yield savings account achieves a different purpose than saving money in a 457(b) or IRA.
Short-Term Goals vs. Long-Term Goals
If you’re going to need the money in the near future, placing it in a high-yield savings account is the better option. Right now, those are paying in the neighborhood of 4-5%. While that’s a stable return, it’s only in line with current inflation so not really a good choice for long-term savings.
Placing money in a retirement account provides tax advantages as well as investment options geared to help you save for your golden years. Those would be a better option for your long-term money.
So, hash out your goals and allocate the money accordingly. Be sure to consider your attitude toward investment risk too. High-yield savings are a conservative option. The investment options available in retirement accounts will include more aggressive choices as well. (And if you need help picking investments that are aligned with your short- and long-term financial goals, consider working with a financial advisor.)
457(b) vs. IRA
As it relates to your retirement goals, you’ll need to do some evaluation. Make sure you are on track to hit your savings target. Saving $300 per pay period may be enough to fund your retirement lifestyle, but it may not be. It all depends on your specific situation and goals, including:
- How much you have saved already
- When you plan to stop working
- How much you’ll need to withdraw from your savings when you retire
There’s too much detail to cover it all here. Talk with a financial planner or take some time to research how much you’ll need and whether or not you’re on track to get there.
If you decide to save more toward retirement, consider the differences between 457(b) and IRA accounts. Both offer tax advantages. Both also allow you to invest your contributions so one is not necessarily always better than the other. Out of simple convenience since you already have the account it may make sense to increase your 457(b) contributions unless you have a specific reason to open an IRA. For example, that might be the case if a Roth account makes sense for you and your 457(b) plan doesn’t have a Roth option. (And if you need more help deciding between saving in an IRA or 457(b), consider working with a financial advisor).
Here are a few noteworthy details to keep in mind:
- Make sure you are getting the full match before you decide to save in an IRA.
- You can withdraw from a 457(b) at any age and avoid the 10% early withdrawal penalty as long as you no longer work for that employer. This may be particularly important if you plan to retire before you turn 59 ½.
Ultimately, whatever you decide to do with it the money you’ll be saving once your car is paid off should move you closer to achieving your goals. If you have short-term financial goals, diverting the money to a high-yield savings account may be best. If you’re more focused on long-term financial goals like retirement, consider saving the money in your 457(b) or opening an IRA.
Tips for Finding a Financial Advisor
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.
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