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Subject:  Re: no matching 401k vs. Roth IRA Date:  8/14/2003  12:01 AM
Author:  Mark0Young Number:  36911 of 88101

Should she still start putting money in [the 401(k)] now or max out her Roth IRA this year instead?

She's 23 and making about $30,000

First, does she have a well-funded emergency fund? This would typically be 3 to 6 months of living expenses in something reasonably liquid and reasonably safe, such as a money market account, a money market fund, or a well-paying savings account.

Since she probably has 35 to 40 years more of work and she is already interested in investing, my guess would be that she will be in a higher tax bracket in retirement than she is now. (Of course we really don't know that.) That would tend to make a Roth IRA more favorable than an unmatched 401(k).

Another advantage of a Roth IRA is that your partner has just about the entire investment universe open to her, so she could go with the investments that make the most sense to her with the most appropriate custodian (e.g., if she invests in individual stocks, having a discount stock broker for the Roth IRA custodian makes sense, or if she prefers to put everything in the Vanguard Total Stock Index Fund, it may make more sense to have the Roth IRA custodian be Vanguard). Contrast that with a typical 401(k), which is usually limited to just the investments offered by the particular 401(k) plan and often have higher fees than one can find with a well-chosen investment with a well-chosen Roth IRA custodian.

Another consideration is that one doesn't really know what will really be the most favorable tax treatment for retirement. Some diversification of tax treatments may be reasonable. Since your partner will probably be contributing to a 401(k) next year when she is eligible for an employer match, getting some money in a Roth IRA now could be the start of the diversification of tax treatments.

There could be other considerations. For example, how disciplined is your partner on saving/investing? Payroll deduction is a very effective way to save without a chance of spending that money (unless one uses credit to spend more than one takes home). Then again, many Roth IRA custodians also have a way to automating the removal of money from one's bank account ("Asset Builder", "Automatic Investment Plan" or some other name that basically says they direct debit the checking account on a regular basis).

If the 401(k) has reasonable investment options and reasonable fees, if your partner has more to invest than she can shelter in her Roth IRA, she may want to consider putting the difference in the 401(k).

Hopefully she won't make the same mistake that I made when I started contributing to my 403(b): I didn't seriously consider expenses or the effects of returns, so I was in an under-performing investment for a few years before I switched to a low-cost 403(b) provider.
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