401k v. Roth IRA

Contribute up to the max your employer matches. Then max out your ROTH IRA. Then back to your 401k.

Make sure you get your full employer match because that is free money. You do not have the flexibility with your investments in a 401k that you get from a Roth which is why you'd contribute to that next.

5500 for the Roth I believe



The max 401k you can contribute is 17,500 I believe but that doesn't include employer contributions

It is possibly less if you are defined as a highly compensated employee

2015 Roth max is $5,500. 401k max contribution is set by the IRS and is $18,000 for 2015. Both of those are assuming you're under 50.

I thought that you could not contribute as much if you are highly compensated depending on the company's overall profile/employment.

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Under current rules, you can backdoor your way into a Roth regardless of AGI levels. You simply contribute to an IRA and then do a Roth Conversion. Who knows how long this "loophole" will stick around.

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While that loophole does exist, it's not as easy as you make it sound and there are a lot of factors that need to be considered before making the conversion.

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If your AGI ever get above a certain amount you won't be able to contribute to the Roth. So get your money in while you can.

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My wife and I are already very close to the cutoff. In that case does it make less sense to do the Roth considering we likely will not be able to contribute more within 5 years?

As you can see Roths are viewed upon very favorably here. If you're concern is paying taxes, you need to sit down with your CPA to determine which course of action benefits you the most. Pay taxes now on a roth (which helps with taxability of social security and capital gains in the future) or pay taxes when you withdraw on your 401k at a potentially much lower rate while sheltering current income taxes at your current rate. How much will your RMD from your 401k be when you reach 70? How much will you need to live? These questions must be answered to effectively answer your question.

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it's not as easy as you make it sound and there are a lot of factors that need to be considered before making the conversion.

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The factors he is referring to are whether or not you already have an IRA in place. If you do, your conversion is done on a pro-rata basis. For example, if you have $95,000 in an IRA and contribute $5,000 to a non-deductible IRA then convert the $5,000, only 5% of it will convert tax free. If not, it is just that easy.

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I keep reading this but what's the logic behind it? Does the Roth IRA offer better investment options?

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The logic is diversifying the taxation of your investments. Those opposed say you won't need as much money in retirement so your taxes will be much lower. Those pro-Roth argue that we are $18T in debt with no end in sight on that number continuing to grow about $1T every 7-9 months and no possible way it gets even discussed in the next two years. In addition, we have numerous wars we have to go start, entitlement programs we have to borrow for, etc etc etc. One day, we'll have to pay for all that. We can either spend less (seriously, stop laughing ) or tax more. Who's to say they won't just say "your tax bracket is now 50%?" Thank God you're a good saver because you'll soon be referred to as a "millionaire and billionaire" that needs to do "your fair share".

Regarding the options, you're limited in the 401k to your options in the plan. In the Roth, you can invest in whatever the heck you want.

Ok I can agree with diversifying if that's the reason. I have a Roth 401k as an option so the Roth IRA isn't as appealing just for the sole purpose of "doing it while I can".

eta: I'm Roth all the way. I'd rather know what I'm going to be taxed up front.