MU researcher finds retirement savings may improve when diversified

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COLUMBIA - Retirement savings can be improved if investors spread their money among multiple vehicles, one MU researcher found. 

Michael O'Doherty, an associate professor of finance at MU, studied how to maximize retirement savings given the current U.S. tax code and available investment options.  

He found investment into both Roth IRA and traditional IRA/401(K) accounts can improve returns and tax exemptions.

"If you look at what taxes are going to look like 20 years from now, 30 years from now in retirement, there's a ton of uncertainty there," O'Doherty said.  

"Roth-type investments investment vehicles really help you mitigate some of that uncertainty,"  he said.

Traditional IRA's are an investment option in which investors can deduct contributions on their tax forms to the IRA immediately, saving money in the short term. The returns on the IRA are taxed later.

For Roth IRA's the taxes are paid upfront, but the returns are tax-free.

"Some people would prefer to use a traditional IRA so they could get that tax deduction right now," said Adam Bethel, an owner of Financial Planners of Missouri. 

"I like the Roth IRA because you can take out the earnings tax free," he said.

Bethel said investing totally in just one type of IRA would mean the loss of possible tax benefits but, he said it's important to consult a financial advisor before making any retirement decisions. 

O'Doherty said investors should be saving as much as possible to put themselves in the best position for retirement.

"You should be contributing as much as you possibly can to these retirement accounts, secondary to that is you want to get the right mix of what you're actually investing in," he said. 

The research, titled "Tax uncertainty and Retirement Savings Diversification" will be published in the Journal of Financial Economics.