Hello All Fools!My company no longer matches 401(k) contribs. Should I continue to contrib, max out my 401(k), or should I concentrate on max'ing out my ROTH IRA?My husband's company doesn't match very much. Should he contrib up to the matched amount, contrib to the max allowed, or concentrate on max'ing his ROTH IRA?Thank you Fools and I hope no one suffers in the snow ...not-so-phasthound
My personal recommendation is to invest in this order until you run out of money to invest:1) Contribute to a 401(k) to the extent of any match2) Contribute to a Roth IRA up to the limit3) Contribute to the 401(k) up to the limit4) Contribute to taxable accounts.
Temper this with the performance and costs of your 401k. If it is a good plan that is working hard for you, then you may want to keep working it. If you feel you can do better in the Roth, then go for it.FuskieWho is freezing to death in HotLanta...
1. How good is your 401k plan? Are there lots of low fee fund choices? If not, that's a reason to stick with a Roth.2. Will your marginal tax rate be lower or higher when you retire than it is now? If you're close to retirement and haven't saved much, the answer is probably "lower", and you might go with the 401k over the Roth. If you're young and already a good saver, your income may be higher in retirement than while working, so the Roth might be the way to go.Nick
I tend to assume that being taxed today is less desirable than being taxed sometime in the indefinite future, so I would continue with the 401(k) before the Roth. However, I have an irregular income, which averages quite low -- I'm told high income people can actually do better with the Roth. Not a very helpful answer, is it: it depends.
I think that the biggest advantage of the Roth IRA over "conventional" IRAs and 401(k) plans is that the income accumulated over the saver's working lifetime is NEVER taxed.During the five years ended July 1982 I put $2,000 per year into a conventional IRA for my wife [Roth IRAs had not yet been invented.] That $10,000 grew to $166,311 at the March 2000 peak of the stock market boom. She is over 70 and 1/2 so we have to make at least the minimum withdrawal. She has taken out $23,000 and still has $75,000 left.If I had put the money into a Roth the distributions would NOT be taxable as ordinary income -- they would be NONTAXABLE.
30% tax bracket at all times10% annual growth of investmentsThe first column shows the pre tax value of the 401k starting with 10,000The second column shows the after tax value of the 401kThe third column shows the same money in a ROTH- after tax (you have to pay tax to put it in, so it starts with less) 401k 401k ROTH1 10000 7000 70002 11000 7700 77003 12100 8470 84704 13310 9317 9317It appears they are identical with a fixed tax bracket. However, if the tax bracket changes when you get older (and your tax bracket will probably go down), then you will be better off with the 401k. (you will get a greater percentage of the left hand number) If you think your tax bracket will go up (or the government will raise taxes in the future) you are better off with the ROTH (because then it will be larger than a smaller part of the left hand number)
>>It appears they are identical with a fixed tax bracketThat's correct...the only interesting twist is if you have the choice between contributing the maximum to a Roth IRA and a Traditional IRA, and have no other retirement plan available (or have also maxed out those which you do have available), the Roth IRA works out better. Nick
I think this is an important point that for some reason isn't well understood: Assuming tax brackets are the same during retirement the 401k and IRA yield the exact same after tax amount if the pretax amount contributed is the same. With the 401k you pay your taxes on principal and interest at the end, while in the roth you pay your taxes on principal at the beginning, and so you forgo interest you would have earned on the principal that you paid in tax. The difference seems to be in how you can get the money out; roth IRAs seem to be more flexible in terms of withdrawls than the 401ks, which is an advantage.And as mentioned, if your tax bracket will be different, that will favor one or the other:If your tax bracket is higher in retirement then go with the Roth.If your tax bracket is lower in retirement then go with the 401k.
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