Roth IRA or 401(k) first?

This is one of those annoying questions where the poster pretty much is already set on the answer but I've found that often when I present the question to the group anyway, I end up learning something (sometimes the something isn't even what I was looking for!)


Alright, that gets the disclaimer out of the way, here goes...


My current theory on this is as follows...401(k) to get the match, fully fund the Roth and then whatever more you can spare into the 401(k) -- and eventually other options as the need arises.


The wrinkle in this for me is my employer doesn't offer a contribution match on our 401(k) but instead makes a deposit once a year into the account amounting to a percentage of our previous year's salary.


This varies but recently has tended toward 4%. The contribution is made whether we participate in the 401(k) or not.


So because of this, I am concentrating on the Roth until I get to the point where I can put the full $4000 in there per year and then I plan to begin incrementing my 401(k) contribution by a percentage point each month until it starts to get "tight."


I think the driving mentality here is that I can never makeup those Roth contributions, if I miss them they're gone. With the higher limits of the 401(k) I can more or less "catch up" later if I want, sure I miss the gains but I can grow the account faster contribution-wise than I can the Roth.


And if it's important, the Roth is with Vanguard and all that has to offer in the way of choices vs. my 401(k) which offers me 8 funds - each a different asset class with one overlap - 3 of the 8 are crap, 1 is "ehh" leaving only 4 that I actually use.


should work? dumb idea? what?

[meaghanchan]

I agree 100%. Sounds like a very good plan.

[creditcardfree]

I agree with you. I think you might as well fund the one that will be tax free in the future. You will still get the employer contribution regardless, so no point in funding the 401K first. I like that you are going to incrementally increase your 401K contribution...to find the right fit.

Good idea!!

[safari]

I can't contibute anything to Roth IRA because my AGI exceeds the eligibility limit, and I am already contributing the maximum I am allowed, which is 8%, to my 401(k). I am planning to open a regular taxable account and start investing in mutual funds. Anyone has better ideas?

[sweeps]

Originally Posted by safari

I can't contibute anything to Roth IRA because my AGI exceeds the eligibility limit, and I am already contributing the maximum I am allowed, which is 8%, to my 401(k). I am planning to open a regular taxable account and start investing in mutual funds. Anyone has better ideas?

Yes, you could contribute to a traditional IRA and then convert to a Roth in 2010 because of a new loophole in the conversion rules. Link

[disneysteve]

Originally Posted by rexdart

So because of this, I am concentrating on the Roth until I get to the point where I can put the full $4000 in there per year and then I plan to begin incrementing my 401(k) contribution by a percentage point each month until it starts to get "tight."

This is absolutely right. Your Roth has a couple of advantages. Withdrawals are tax-free and you have a much broader choice of investment options. Fully fund your Roth each year (currently $4,000 and rising in future years) and then do the 401K.

[TBH]

I struggle with this question, too. My taxable income is low at the moment because the IRS considers me a single parent (I'd be happy to declare my partner if they'd let me). I think I'd be better off pouring $$ into the Roth.

However, even tho I know it's not the best idea, I prioritize the 403b. I have a few reasons for this.

1. I know myself and I am more likely to stop auto contributions to the Roth if $$ feels tight. I've done that before. But I have never felt tempted to reduce my employer-sponsored plan contributions, mostly because I hate dealing with the HR department. So I know I'm less likely to drop the ball if I do it this way.

2. My contributions to the employer-sponsored plan are based on a percentage of income, not a fixed dollar amount. That way, each year when I get a raise, my contributions go up a little. If I was contributing a fixed amount monthly to my Roth, it would be harder to raise the bar every year.

3. I usually put windfalls in my Roth. If I was maxing the Roth, it would be pretty hard to put a windfall in my employer-sponsored plan. So having all that room in my Roth to put windfalls increases my flexibility.

Of course, all this means it has been many years since I maxed the Roth. I think it was back when the contribution limits were 2K that I last maxed it. But I do contribute something every year, and I have converted an old workplace plan to a Rollover IRA and then from there into my Roth, so I guess I could do that again if I wanted to.

Thougths? Anybody think I'm crazy to do it this way?

[sweeps]

claire, you're not crazy at all. You've listed the psychological factors that many people don't consider when choosing between a 401/403 and a Roth. If contributing mainly to an employer's plan means someone ends up saving substantially more for retirement, that should be the primary factor to consider.

[TBH]

Thanks, Sweeps. That's exactly it. I have to psyche myself into saving.

The other psychological benefit to doing it the way I do it: Because the $$ is pretax, I can put more money in without it hurting as much and it looks like it's growing faster. This helps motivate me to save more.

Originally Posted by claire

But I have never felt tempted to reduce my employer-sponsored plan contributions, mostly because I hate dealing with the HR department. So I know I'm less likely to drop the ball if I do it this way.

Claire, you may have very well just solved the US retirement savings "crisis"...

sourpusses in personnel!


but hey, I'm with Sweeps, all the thinking and planning is worthless if you don't do it, as long as you're saving, that's what counts.

[TBH]

Originally Posted by rexdart

Claire, you may have very well just solved the US retirement savings "crisis"...

sourpusses in personnel!

I love it!

Don't even get me started on this topic.

I wonder if the powers that be ever say to HR, "we can't afford to fund everybody's retirement plans, so please make it as difficult as you can for people to actually sign up."

[disneysteve]

Originally Posted by claire

I wonder if the powers that be ever say to HR, "we can't afford to fund everybody's retirement plans, so please make it as difficult as you can for people to actually sign up."

Actually, more and more companies are doing automatic enrollment. When you get a job, you are automatically enrolled in the 401K plan with a 3% contribution. You have to personally request to opt out if you don't want to participate. Some places even automatically up your contribution each year. I think this is a great idea as it makes savings idiot-proof.

[Ima saver]

I agree with rexdart, I think he/she should fund the roth ira first.

[jmjj215]

Originally Posted by disneysteve

Actually, more and more companies are doing automatic enrollment. When you get a job, you are automatically enrolled in the 401K plan with a 3% contribution. You have to personally request to opt out if you don't want to participate. Some places even automatically up your contribution each year. I think this is a great idea as it makes savings idiot-proof.

Will be starting my first "real job" on Tuesday and they did just that. They only match 25 cents on the dollar up to six percent, but hey 25% on my money isn't so bad. I also just found out the company contributes separately to a pension fund on each employee's behalf. So the 25% match is more than made up for by other contributions flowing in.

[TBH]

Hey, jmjj215, congrats on the new job.