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Subject:  Re: Hurray For Me!!! (And New Qustions) Date:  5/23/2002  8:44 PM
Author:  brwhiz Number:  34594 of 90428

If your employer matches a part of your 401k, you will want to put enough into the 401k to qualify for ALL the free money.

For a young person, a Roth IRA is a really great choice. So my order of priorities would be:
First, enough into 401k to qualify for all match money
Second, fund a Roth ($3000 this year)
Third, go back to increase 401k to maximum allowed.
Fourth, tax-efficient investments in taxable account.

I would offer much the same advice, provided that you can afford to fund the 401(k) AND the Roth IRA to the point that you can build up your emergency reserve of $2000 in the Roth fairly quickly. Since you only need to contribute $258 for the employer match, this should be a cinch.

In fourth place, I would recommend a traditional non-deductible IRA. You are allowed to put the same amount of after-tax contribution into this type of IRA as you can into a Roth. And your contributions (but not any yields) to BOTH types of account are retrievable, in case of an emergency, without any penalties. The EARNINGS on the traditional IRA are like your 401(k); you aren't taxed until you take a distribution against earnings. So after retirement, you first withdraw against your contributions until you have withdrawn an amount equal to your TOTAL contributions, THEN you pay taxes on any subsequent withdrawals at whatever your marginal tax rate is at THAT point.

You have until April 15, 2003 to fully fund the $3000 into each of the IRA's (later, if you file for extensions on filing your return - up to October 15, 2003).

So this year you can contribute $11,000 to your 401(k), $3000 to your Roth, and $3,000 to the non-deductible IRA for a total of $17,000. Add to that the $258 contribution by your employer and that's a darn good jump on your future retirement (if you stick to maximizing your contributions).

Another thing you might want to check on is the possible availability of some variety of 457 plan. These are typically restricted to government employees and employees of non-profit organizations, but they are cropping up more and more in some strange places. If available, you could sock away another $11,000 of PRE-TAX contributions this year. But I would put that in fourth place, after getting the emergency fund established in the Roth.
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