Should I put any money into a Roth IRA, or should I just put it all into my 401K?

Answer 1

If you are young, or expect to be in a higher tax bracket when you retire than you are now, it makes sense to contribute enough to your 401(k) to get the maximum possible match from your employer, then any other money you want to save for retirement should go to your Roth IRA.

If you expect to be in a lower tax bracket when you retire, put all your money in the 401(k), or enough to get the maximum match with the rest going to a Traditional IRA (which, for the most part, has the same tax benefits as a 401(k), but more investment options).

The reasoning behind this can be shown if you were to assume your tax bracket will be the same in retirement as it is now. Let's say you're in the 25% tax bracket at both times:

$100 pretax goes in your 401(k). You don't contribute any more, and earn 10% per year for 30 years. At the end, you'll have 1744.94 (1.1^30 * 100). Taxed at 25%, you'll have 1308.71 left.

$100 pretax becomes $75 after taxes to go into your Roth IRA (since Roth contributions have to be taxed first). Again, you don't contribute any more and earn 10% per year for 30 years. Do the math again (1.1^30 * 75) and you end up with 1308.71, tax free.

Six of one, half dozen of the other, see?

So you have to figure out where your tax bracket is higher and avoid paying taxes at that time:

Higher in retirement? Avoid taxes in retirement by paying them now before putting after-tax dollars in your Roth IRA.

Higher now? Avoid taxes now by contributing pre-tax dollars to your 401(k).

You need to factor in employer matching though, which can be a 50% to 100% instant return on your investment. This trumps the tax benefits of a Roth IRA, unless you plan on being in a 50% to 100% tax bracket at some point in your life - not likely!

If you're liking the Roth IRA, a Roth 401(k) may interest you, since it combines the best of both worlds - matching funds from your employer, and tax free withdrawals at retirement (contributions are taxed, like a Roth IRA, and I believe employer matching funds are not taxed, and go into an account that is taxed at withdrawal, like a regular 401(k)). This is a new type of retirement account that only a very few employers offer at this time. So if yours doesn't, talk to your HR or benefits department about it.

Another thing to keep in mind is that there are limits (currently $4000 per year if you're under 50 years old) to how much you can contribute annually to all of your IRA accounts combined. So if you get your maximum match in your 401(k), and contribute the maximum $4000 to your Roth IRA, and you still have leftover money you want to save for retirement, you can start putting more in your 401(k). If you've reached the maximum for the 401(k) ($15,500 for 2007, I think) and you still have leftover retirement money, send it to me :)

Answer 2

I have both a Roth IRA and a 401K. A 401K is a great thing to have, especially if your company offers any matching on it. It also allows you to fund it pre-tax, which can be a nice bonus.

The reason I have a Roth IRA as well is because even though the money does get taxed now, it will not get taxed when you withdraw it when you retire. Assuming that tax rates stay the same or increase by the time you retire, you're better off paying tax now on the small amount you put in rather than the large amount it hopefully becomes. Having a Roth IRA, or traditional IRA for that matter, also gives you the freedom to choose whatever funds you want to invest in. Most 401Ks only give you a certain amount of funds as options (mine gives me 10 for example).

It would be better to invest in a Roth IRA now rather than later because it does have a cutoff where if your salary is over a certain amount per year, you can no longer contibute. Check with your investment firm for the actual amount.

Answer 3

Make sure to start a 401K and put in enough for the Company Match. After that I would recommend maxing out the roth IRA. I think that amount is $4000 this year. If you have funds left then can increase your 401K. The benifet of the Roth IRA is you can get your max Social Security because withdraws don't count as income and not taxed on any gains.

Answer 4

You should put enough in your 401k to get the company match. Then contribute the max to a Roth IRA. If you can afford to save more, go back and put more in your 401k.

This is unless you have a Roth 401k, in which case you should just go ahead and put as much in there as you can.

I am all for Roth accounts no matter how much you make or what bracket you think you'll be in later, because the government is probably going to have to raise all the tax brackets; taxes are at a historical low, if you can believe it. So no matter what, you'll probably be in a higher tax bracket later. Just pay the tax now and be on the safe side!

Answer 5

Max the ROTH first and then do the rest into a 401k. The ROTH will grow tax free and since you already paid taxes on it, you won't pay the taxes when you withdraw the money.

For more explanation I suggest you read The Total Money Makeover by Ramsey.

Answer 6

My suggestion would be to max out the allowable amount thru 401k, since it's tax free. And any addition funds you have, I would start the Roth IRA.

Answer 7

If your company matches, then contribute to that 401k up to the max for matching. That's free money they are giving you. Then contribute to a Roth up to that limit(limits are lower than 401k or 403b). If you have contributed up to the match for the 401k , and have maxed out your Roth for the year, then I would start back into the 401k up to that max. If you still have funds left over then invest in mutual funds, real estate, life.

Answer 8

I'd put money in both. No one knows what the tax environment will be when we retire and having money in different tax buckets allows you to take money out based on the situation then. If tax rates are high at retirement, that ROTH will come in handy. If they are low, the 401-K will be better. That said, if you get a match, take that first, then the ROTH.

Answer 9

Some of the companies 401K programs now have Roth's in them. If yours does not call your company and urge them to get one.

Answer 10

Depends on your circumstances - age, income, etc. 401k comes off the top so it affects your income tax directly. It's all pretax money so it won't be taxed now and your income will be reduced. Example: you earn $50,000 and contribute 10% to your 401k, your taxable income is $45,000.
Also, does your company match your 401k? If so, contribute to it first!