fallrain
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Location: Dingmans Ferry, PA
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| 401K VS. ROTH IRA |
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Hi my girlfriend is in her mid fifties and has been contributing to her 401K with a passion for the last fifteen years. Her employer pays three percent on every dollar that she saves. The term Roth IRA is new to her yet intrigues her due the tax break that it offers at retirement age. My question is should she max out a Roth IRA first and then contribute what she can afford to her 401K? She makes under the $100,000 per year so the Roth IRA would be the IRA for her income. She would invest in a Roth in mutual funds similar to the ones in her 401K. We would appreciate your thoughts on this matter. Thanks, Ron
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Thu Dec 06, 2007 8:34 pm |
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coaster
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Well, the three percent is free money, so when there's a match usually the rule of thumb is to max out the 401(k) to whatever amount they'll match first. On the other hand, it might depend what the company is investing her 401(k) in. If it's all company stock, and/or the performance has been doggy, she might be able to do well enough in her own account to offset the three percent match.
~Tim~
Eye Candy : Why Whimsy
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Thu Dec 06, 2007 8:56 pm |
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Apollo
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I would only contribute as much money into a 401k as the company matches and not a penny more. 401k plans are better then nothing but there are better options available (it always depends on the 401k).
It is not smart to play it safe but it is safe to play it smart.
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Thu Dec 06, 2007 10:17 pm |
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efflandt
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Something to note is that the 3% match is probably NOT 3% of what she contributes, but may be a dollar for dollar match of the first 3% of her salary that she contributes (often, but not always, to a maximum dollar limit). So her first 3% of salary contribution grows her 401k principal 6% (plus gains).
In our company they match 4% of our salary contribution dollar for dollar to a maximum just bumped from $1400 this year to to $1600 limit next year.
I am in my mid-50's and have been increasing my 401k contributions over the past few years. But I also started maxing out a Roth IRA and converting about $10,000/yr traditional IRA money to the Roth IRA. Hopefully a significant portion in the Roth will put me in a lower retirement tax bracket than a possibly higher tax bracket than I am in now if all was in 401k/traditional IRA.
Someone should probably NOT stop contributing to their 401k while accumulating the money for the Roth IRA, because matching funds are usually spread over the year. It is more a matter figuring out your budget to accumulate or contribute the Roth money monthly, and adjusting 401k contributions to contribute as much as you can throughout the year without running short for current expenses, but never dropping below the minimum needed to get the full match.
The amount of 401k contributions might also consider whether butting up against a higher tax bracket or ineligibility for a Roth, since 401k contributions reduce taxable wages.
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Thu Dec 06, 2007 11:09 pm |
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coaster
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Ah, good point!! When I was working the company match was 50% of the amount contributed so I forgot it could also be a percent of salary. That would make the 3% figure a whole lot more attractive and at least half of my first post meaningless. 
~Tim~
Eye Candy : Why Whimsy
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Fri Dec 07, 2007 2:46 am |
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fallrain
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Location: Dingmans Ferry, PA
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| THANK FOLKS |
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Thank you for all the input on this topic, it was very helpful. Her 401K are not her company stocks and they are diversivied so she is save there. I guess the way to look at it is you're saving about 25 percent right off the bat being tax devered if I'm saying that correctly. So that is 25 percent more in funds than if it were a ROTH. My companies 401K only donates $500 a year providing we put in $1500.00 a year. I'm in my fifties and I'm at least doubling that as well as maxing out a ROTH. Thanks again, I'm glad that I found this web site with all the information that it offers. Thanks, Ron
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Fri Dec 07, 2007 11:20 pm |
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coaster
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You're welcome Ron. Stick around and give us your two cents on some of the topics. 
~Tim~
Eye Candy : Why Whimsy
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Sat Dec 08, 2007 1:05 am |
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pf101
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There are a few things to think about. For most people, the following investment method works well:
1 - max out 401k to match
2 - max out roth
3 - max out 401k
4 - invest in taxable investments
However, something to bear in mind is what are her investment options within her 401k? If her match really is only 3% of her contribution, unless she has good, low-expense investment options, there's a good chance that the entire match will be eaten away by higher expenses after a few years.
A match is great, but not always if you have to invest in crappy things to get it.
Make sure you look at the whole picture, including long-term expenses, before you finalize anything.
Personal Finance 101
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Sun Dec 09, 2007 12:08 am |
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