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401k versus Roth IRA Contributions
Posted on 3/5/11 at 7:38 am
Posted on 3/5/11 at 7:38 am
I currently contribute 12% of my salary into my company sponsored 401k plan; they match about one third of my contributions currently. I'm wondering if I should halve my contributions and use the other 6% to open and fund a Roth IRA. My thinking is that only 1/3 of my 401k contributions are matched, so the "excess" 6% could be better used in a Roth. My only reservation is that I might lose the tax advantage now of deferring the 12% into the 401k, whereas I'd only realize 1/2 of that deferral benefit by redirecting funds to the Roth. Any advice would be greatly appreciated.
Posted on 3/5/11 at 8:17 am to FlowMaster
$5000 is the limit for the Roth for the year.
It is tax free when you withdraw.
401k will not be.
It is tax free when you withdraw.
401k will not be.
Posted on 3/5/11 at 8:22 am to FlowMaster
Here's the general prioritization I use when figuring out where I should direct my retirement savings:
1) Contribute to 401k up to company match - in your case this would be ~4%
2) Contribute the remainder to a Roth IRA until you hit the limit
3) Contribute the remainder to a traditional IRA - though I think if you've hit the limit in a Roth you won't be able to contribute to a traditional
4) Any remaining allocated retirement funds should then go back to your 401K (add to the 4% above)
My rational in using IRA's instead of 401k (after you've exhausted the company match) is that you have many more investment options. Also the overall tax advantages of a Roth will most likely be better than the 401k assuming you're ok with less take home right now.
One more advantage of a Roth IRA is that you can withdraw your contributions at any time without penalty - you shouldn't ever plan on doing this but there is significant value in having this option compared to the others.
1) Contribute to 401k up to company match - in your case this would be ~4%
2) Contribute the remainder to a Roth IRA until you hit the limit
3) Contribute the remainder to a traditional IRA - though I think if you've hit the limit in a Roth you won't be able to contribute to a traditional
4) Any remaining allocated retirement funds should then go back to your 401K (add to the 4% above)
My rational in using IRA's instead of 401k (after you've exhausted the company match) is that you have many more investment options. Also the overall tax advantages of a Roth will most likely be better than the 401k assuming you're ok with less take home right now.
One more advantage of a Roth IRA is that you can withdraw your contributions at any time without penalty - you shouldn't ever plan on doing this but there is significant value in having this option compared to the others.
This post was edited on 3/5/11 at 8:27 am
Posted on 3/5/11 at 11:32 am to Pheeze
quote:
One more advantage of a Roth IRA is that you can withdraw your contributions at any time without penalty - you shouldn't ever plan on doing this but there is significant value in having this option compared to the others.
I don't think this is accurate. There are some instances where you can withdraw funds, though.
Posted on 3/5/11 at 12:13 pm to The Easter Bunny
yeah, i thought there was a 10% penalty, with some limited exceptions.
Posted on 3/5/11 at 12:25 pm to The Easter Bunny
quote:
I don't think this is accurate.
You are not taxed on your contributions but you are taxed on any profits you withdraw.
Posted on 3/5/11 at 1:20 pm to The Easter Bunny
quote:
I don't think this is accurate. There are some instances where you can withdraw funds, though.
I think you're thinking of the penalty for withdrawing earnings.
You can withdraw your contributions at any time but if you choose to withdraw your earnings as well then there's a penalty except for a few exceptions (educations, first time home, etc.)
Posted on 3/5/11 at 9:19 pm to Pheeze
Pheeze is correct, and I agree with his tiered breakdown of where to contribute and when.
You can withdraw your contributions from a Roth at any time without penalty. The reason why is that with a Roth you are contributing money you've already paid taxes on. It's earnings that you can't take out, because the earnings are tax-free.
With a traditional IRA, both contributions and earnings are restricted because you haven't paid tax on either. Not the same.
You can withdraw your contributions from a Roth at any time without penalty. The reason why is that with a Roth you are contributing money you've already paid taxes on. It's earnings that you can't take out, because the earnings are tax-free.
With a traditional IRA, both contributions and earnings are restricted because you haven't paid tax on either. Not the same.
Posted on 3/6/11 at 12:08 pm to FlowMaster
Much of this depends on tax planning and what the contributions mean to your current tax situation and what it may be in retirement. If you retire and are at a Fed tax rate of 25% a $750K Roth is worth the same as $1M in a traditional 401k/IRA. Having no idea what future tax rates will be it is worth contemplating adding a Roth for tax diversification if no other reason. If you are young the Roth can make a lot of sense, but you could also intend to convert 401k savings into Roth if your retirement tax rates are low. Unless people are highly skilled investors, earn/save at a rate well above average, etc many will retire at a lower tax rate which would allow conversions to the Roth at lower tax rates than when working FT if tax policy remains similar to current policy.
Paying estimated taxes on portfolio/savings earnings sucks, that I can tell you.
Paying estimated taxes on portfolio/savings earnings sucks, that I can tell you.
Posted on 3/7/11 at 12:22 pm to FlowMaster
How has your 401 been doing?
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