As a public sector employee, you have a pension with CalPERS, CalSTRS, or other similar organization. So why do you need to invest in an IRA account?
Retirement Income Shortfall
Why should you contribute to an IRA account? Or a 401k / 457 / 403b?
Many people do not have enough service credit in their CalPERS account to reach 66% of their former employment income. In addition, some people do not reduce their expenses upon retirement, thus making retirement a hardship.
To make up the difference, you should invest in either your employer’s 401k, 457, or 403b retirement account, or open up an IRA account.
Retirement from 401k / 457 / 403b
With these accounts, you can save a lot more than the IRA maximum, which is $5000 for those younger than age 50, and $6000 for those 50 or older.
In 2010, you can save $16,500 into your 401k/ 457/ 403b if you’re younger than age 50. Those older than age 50 can put in $22,000.
With your employer plan, you have access to many different types of mutual funds. Although the selection is limited, you should have access to every category of investments from money market mutual funds, bond mutual funds, and stocks.
Retirement from an IRA Account
As mentioned earlier, the amount you can put in an IRA is far less than an employer retirement account. Nevertheless, you have unlimited flexiblity with an IRA that’s not available in a employer plan. You can buy individual stocks, ETFs, individual bonds, CDs, and many other investments in an IRA, which are typically not available in a conventional plan.
Another advantage is that you can withdraw your entire account balance in an emergency, with a steep 10% tax penalty plus income taxes. With a 401k or 457 account, you might be able to take a loan of 50% of your account value, but you have to make monthly payments plus interest to pay back the 401k loan.
Even with a low annual investment towards retirement, if your have a 401k match funds from your employer, you should consider investing the minimum to get the 401k match.
Regular Brokerage Account
In this low interest rate environment, it may pay to invest outside of a tax deferred retirement account like a regular brokerage account. Even within a regular brokerage account, you can get upwards of 10% tax equivalent yield with California muni bonds and tax free money market funds. Stocks and other investments also have a very low captial gains tax as well. And withdraws from a regular brokerage account have no penalty, unlike any of the other options.
In conclusion, if you plan to invest less than the $5000 / $6000 maximum in an IRA account every year, it’s best to contribute to the IRA account for maximum flexibility or even a regular brokerage account. Otherwise, you’re probably better off in your 401k / 457 / 403b due to the much bigger contribution limits. This is especially important for those who are getting less than 66% of their employment income during CalPERS retirement.