ROTH IRA, 401k, or ROTH 401k?

**thebetterlifenow** · 02-17-2007, 09:56 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Unless the 401k is matched, I would do the Roth first.

**meaghanchan** · 02-18-2007, 08:39 AM

Re: ROTH IRA, 401k, or ROTH 401k?

A rule of thumb I've heard many times before (Dave Ramsey also reccomends this way)

1. Fund 401(k) to the match
2. Fund Roth IRAs
3. Fund 401(k) to max

As an example, if you were making a household income of 50,000 and had a 50% match on the first 6% of salary (3,000), and wanted to contribute 15% of your total household income to retirement ($7500) you would do:

1. $3000 to 401(k)
2. $4500 to Roth IRA (would have to be split up between both husband's and wife's IRAs)

And of course just divide by 12 to get monthly contributions.

And as a side note- you are eligible to contribute to a Roth IRA if you don't earn income but your spouse does. This is called a spousal IRA.

**MonkeyMama** · 02-19-2007, 07:54 AM

Re: ROTH IRA, 401k, or ROTH 401k?

I would do the ROTHS first because you would have much more control over that money.

I would put everything in a tax shelter personally. You can invest the ROTHs in the same investments but it is tax sheltered. IT will take a while to build up though, would suggest contributing the max any way you can to build the balance up so you have more investment options with it over time.

**sweeps** · 02-19-2007, 10:29 AM

Re: ROTH IRA, 401k, or ROTH 401k?

The Roth 401k is particularly enticing because you can effectively get beyond the plain ol' Roth's limit of $4k/year. Also $15k of Roth 401k money is worth more than $15k of traditional 401k money. That means more money sheltered from taxes.

If the Roth 401k is matched, then you're really sitting pretty.

**anonymous_saver** · 02-19-2007, 11:14 AM

Re: ROTH IRA, 401k, or ROTH 401k?

I agree with other posters.

First, pay up to the match in your 401(k) - preferably do a Roth 401(k) since that is being offered!
Second, put up to the max allowed into both of your Roth IRA's.
Third, if you have extra money up your [Roth] 401(k) contributions.

Also, may I ask what your $200/m in non-retirement investments is for? If you are just putting this money into a regular non-retirement brokerage account, I would stop this and instead focus on the other goals (the Roth 401(k) and Roth IRA's). Having $350,000 in non-retirement mutual funds is quite large. May I ask why you have this account instead of maxing out your 401(k)?

Do you have an emergency fund saved up?

Also, the reason I would go with the Roth 401(k) instead of a regular 401(k) is simple. You do not get taxed when you withdrawl the money in your retirement. This is usually the best option for at least 90% of people since typically our tax rates will increase as we get older, especially since they are quite low right now. I am currently talking with my HR (I work at a large University) about offering a Roth 403(b) in addition to the regular 403(b)... hopefully, I will be as lucky as your husband soon. =)

**TBH** · 02-19-2007, 12:34 PM

Re: ROTH IRA, 401k, or ROTH 401k?

I'd max a Roth IRA each for yourself and your spouse first, because you don't get a match on the 401k. If you're planning to go back to work and then don't expect to be eligible for a Roth, all the more reason to fund one now. You'll probably be in a higher tax bracket when you go back to work.

After you fund the Roths, I'd put any extra in the Roth 401k (altho I don't know if you can fund both a Roth and a Roth 401k, anybody know?) also because your taxes will go up later on.

Do you have college accounts for your kids? Might want to start one...

I also want to know, why the big taxable account? The only thing I can think of is that you're saving up for a house in an expensive area and want to wait til you have an extra big down payment before you buy. Hmm. Do tell.

**anonymous_saver** · 02-19-2007, 01:37 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Yes, you can contribute to both a Roth IRA and a Roth 401(k).

**disneysteve** · 02-19-2007, 02:07 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Originally posted by MonkeyMama

I would do the ROTHS first because you would have much more control over that money..

Bingo! I was reading the responses waiting to see this advice. In a Roth IRA, you control the money and can invest it virtually anywhere. In a 401K or Roth 401K, you are limited to the choices the company gives you. Much better to have full control, especially since there is no company match.

**kv968** · 02-19-2007, 02:54 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Originally posted by zetta

We're currently in the 25% federal tax bracket, although after considering deductions our effective tax rate (federal + state) is about 19%. We'll only be eligible to contribute to the ROTH while I am a SAHM -- when I return to work in about 3-5 years our income will be over the limit.

I agree with the others and say max both of the Roth IRA's before anything else. I also have the question others do of what is all that money in non-retirement mutual funds for?

Another thing I'd like to comment on is about the Roth income limit. With the way the rules are about to change in 2010 there will essentially be no income limit on the eligibility of funding a Roth from that point on. In 2010 anyone, regardless of income levels, can convert a traditional IRA into a Roth (paying the applicable taxes of course). If no legislation is brought about to change it, this means anyone can contribute to a Roth. If you're over the income limits of a Roth all you would have to do is fund a non-deductible IRA and then convert it. Of course this is all taking into consideration that they don't change the rules again before that time.

**zetta** · 02-19-2007, 04:21 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Yes, both emergency fund and college fund are covered.

I have a lot of money in the taxable account because:

my dad became a stockbroker and started a mutual fund for me with $250 when I was 12.

I added about $4k to the fund as a teanager.

In my 20's I maxed out my 401k and contributed about $3k more to the taxable fund.

I added money I received as gifts.

I made about $150k profit on a townhouse 5 years ago and decided to invest it instead of rolling it into the downpayment on the next house.

The mutual funds have performed very well during the recent bull markets.

I've never been quite sure what is the proper balance between retirement and taxable savings, especially since I've got a good base in place already. I'd like to contribute at least something each month to the taxable investment account -- I don't have a particular goal but it might be nice to retire early or have the funding to start a business someday -- what do you think of splitting it 70% retirement/30% taxable?

**disneysteve** · 02-19-2007, 04:38 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Originally posted by zetta

I've never been quite sure what is the proper balance between retirement and taxable savings

I think it depends on your situation and what you are saving for. In my case, the only retirement vehicles I've got are a Roth for my wife and I. No employer plan. So once we max our Roths each year, everything else goes into taxable accounts. I'm looking forward to 2008 when the Roth limit starts climbing with inflation each year. If I had a 401K, I'd max that and the Roth and put anything after that in the taxable accounts.

**jIM_Ohio** · 02-21-2007, 01:08 PM

Re: ROTH IRA, 401k, or ROTH 401k?

My answer to "Roth or traditional" depends on a few things... you suggest you will be above Roth income limits when you return to work. My short answer is max out the Roth's (Roth 401ks and Roth IRAs) as much as possible. Several reasons:

Roth IRA eligibility is something which can come and go. When you are eligible max that benefit.
If you have traditional IRA/ Traditional 401k accounts, do an estimate of what account will be worth in 20-30 yrs (when you retire). What tax bracket would the RMD be at age 70 1/2? The point is making "excess" 401k contributions could push you into a higher tax bracket than you want to be in retirement.

I consider my Roth to be the "core" of my portfolio. Jobs will come and go. 401ks will get rolled over and over... but Roth is constant. So contributing to the core, to grow the core, makes sense (at expense of other investment/ retirement vehicles).

What I did to choose between traditional 401k and Roth 401k was add the 401k assets I have (115k) and extrapolate this to age 70... I would not have enough "today" to push my tax bracket higher... so traditional 401k now makes sense.

Within 3-4 years I fully expect this calculation to swing the other way. Once I am not eligible for Roth IRA, using the Roth 401k is a "must have", then follow that with contributions to "taxable accounts", forgoing all current tax deductions to avoid large tax bills down the road.

**jIM_Ohio** · 02-21-2007, 01:13 PM

Re: ROTH IRA, 401k, or ROTH 401k?

Originally posted by zetta

Yes, both emergency fund and college fund are covered.

I have a lot of money in the taxable account because:

my dad became a stockbroker and started a mutual fund for me with $250 when I was 12.

I added about $4k to the fund as a teanager.

In my 20's I maxed out my 401k and contributed about $3k more to the taxable fund.

I added money I received as gifts.

I made about $150k profit on a townhouse 5 years ago and decided to invest it instead of rolling it into the downpayment on the next house.

The mutual funds have performed very well during the recent bull markets.

I've never been quite sure what is the proper balance between retirement and taxable savings, especially since I've got a good base in place already. I'd like to contribute at least something each month to the taxable investment account -- I don't have a particular goal but it might be nice to retire early or have the funding to start a business someday -- what do you think of splitting it 70% retirement/30% taxable?

If you want to retire early, the taxable account is where you need some "meat" in the portfolio (until IRA distributions are taken at 62, I believe). This account also gets favoarbale tax treatment relative to 401ks (capital gains rates 10-15% relative to income rates (15%-25%-33% etc..)

ROTH IRA, 401k, or ROTH 401k?