Retirement plan creationGenerally speaking, I am no fan of 401(k) plans.

They are brimming with high costs, conflicts of interest, and poor investment choices. The primary beneficiaries of these plans are mutual funds and plan advisers who skim off billions in fees-money that should be going into the accounts of plan participants.

The allure of these plans is the corporate match. It’s tough to argue against that benefit, no matter how deficient your plan may be. If your employer will match your contribution, you should seriously consider investing the minimum necessary to obtain the maximum match.

What if your employer doesn’t match your 401(k) contribution? Here are three things you can do to create your own best retirement plan.

# 1: Invest in a Roth IRA
I am a big fan of the Roth IRA. Unfortunately, not everyone qualifies for it.

The primary restriction is income. Income limitations are based on your modified adjusted gross income, which you can find on your IRS Form 1040. Or download IRS Publication 590, Individual Retirement Arrangements.
For 2010, if you are single, head of household, or married filing separately and did not live with your spouse during the tax year, your maximum income cannot exceed $120,000. If you are married and filed jointly, your maximum income cannot exceed $176,000.

There are other restrictions, but the income limitation is the big one. If you do qualify, the contribution limits are the same as for the traditional IRA. You may contribute up to $5,000 (or up to $6,000 if you are at least fifty years of age).

Better yet, if you qualify for a Roth IRA, your spouse may open up a spousal Roth IRA and contribute the same amount, even if he or she doesn’t work.

The big benefit of the Roth IRA is that you make contributions with already-taxed income, but you won’t pay any taxes upon withdrawing up to the amount contributed. And there’s no tax on investment earnings within the Roth once you reach age 59 1/2, as long as the plan has been in existence for at least five years. You also won’t have to take required minimum distributions at age 70 1/2. And there are some great features for passing down a Roth IRA to your heirs.

If you don’t need the immediate tax break, you should seriously consider a Roth IRA. The tax deductions offered by a traditional IRA (see below) are more than offset by the overall benefits of the Roth.

# 2: Invest in a Traditional IRA
A traditional individual retirement account permits you to make tax-deductible contributions up to $5,000 ($6,000 if you will be fifty or older by the end of the year).

A traditional IRA gives you many of the benefits of a 401(k) plan, without the burdens. Here’s why it may be right for you:

  • You have better investment options. You control the selection of funds in which you can invest.
  • IRAs promote disciplined savings. You can direct the financial institution to deduct a specified amount periodically from your checking or savings account.
  • You get an initial tax break. Your contributions are deductible.
  • Your money grows tax-free. Taxes are deferred until you start withdrawing cash.

While this sounds pretty good, there are some downsides to traditional IRAs:

  • You have to take minimum annual distributions once you reach the age of 70 1/2. If you don’t, you’ll incur a fairly steep penalty.
  • You’ll incur a penalty if you withdraw your cash too soon. Withdrawals before you reach age 59 1/2 will result in a 10 percent penalty tax on the amount withdrawn.
  • The tax bill might be steep. You will have to pay taxes at your marginal income tax rate on the entire amount withdrawn on the date of withdrawal.

Traditional IRAs are still worthy of consideration, especially if you don’t qualify for a Roth IRA.

# 3: Create an after-tax account
When you invest in a 401(k) plan, or a traditional IRA, you are counting on the benefit of tax deferral. You could win the bet if tax rates stay the same or go down. But what if they go up? You are going to take a big tax hit on all the money withdrawn, based on your marginal tax rate on the date of withdrawal.

If you invest in an after-tax account, you don’t get the benefit of a tax deduction, or tax deferral. But if you stay invested for a year and a day, the gain on your investment will be taxed upon withdrawal at the historically much lower capital gains rate.

An after-tax account also gives you more flexibility, since there’s no penalty for early withdrawal and no required minimum distribution at age 70 1/2.

Many investors assume a tax-deferred account is beneficial to them. The reality is that an after-tax account can be just as good-or better.

Creating your own best retirement plan means figuring out what your options are and thinking about how you’re going to salt away the savings. The savviest investors will take advantage of every opportunity to put away as much as they can.

Which type of retirement account are you using?

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Dan Solin is a best-selling author, a wealth advisor with Buckingham, and the director of investor advocacy for the BAM Alliance.