401k

[Frugal45]

My wife's company does not match 401k, and her plan options are lacking. I am satisfied with the options in my plan. If we do not have the ability to max out both 401ks, would it make more sense to:

A: Contribute more than I would to mine (eg. what she would be contributing to hers), and if I max it out then start putting money in our Roth IRAs up to the 10k limit (5k each)
B: Contribute equally to both, even those her plan does not match

I make about 25k more than her, we were in the 25% bracket this year, had we not contributed to my 401k it would have been 28, and would not be able to get below 70k to get in the lower bracket.

[disneysteve]

I would have her put 5K into a Roth while you put enough into your 401k to get the full company match. Then put 5K into your Roth. Then go back to funding your 401k with the remainder of your retirement money. If that doesn't add up to as much as you want to contribute, put the rest in a tax-efficient taxable investment that you earmark for retirement.

[Frugal45]

I would have her put 5K into a Roth while you put enough into your 401k to get the full company match. Then put 5K into your Roth. Then go back to funding your 401k with the remainder of your retirement money. If that doesn't add up to as much as you want to contribute, put the rest in a tax-efficient taxable investment that you earmark for retirement.

I follow you on everything with the exception of going to Roth then back to 401k? What is the advantage there?

[bjl584]

I follow you on everything with the exception of going to Roth then back to 401k? What is the advantage there?

It's just a saving strategy. Start with the 401K up to match. Then shift to Roth. Once Roth is fully funded, shift back to the 401K. Once 401K is fully funded, then shift to a taxable brokerage account.

[Frugal45]

It's just a saving strategy. Start with the 401K up to match. Then shift to Roth. Once Roth is fully funded, shift back to the 401K. Once 401K is fully funded, then shift to a taxable brokerage account.

Right, but what is the advantage vs. going all 401k up to the max then Roth? Is it so you can take out what you put in in an emergency?

[bjl584]

Right, but what is the advantage vs. going all 401k up to the max then Roth? Is it so you can take out what you put in in an emergency?

I would argue that having both a 401K and a Roth gives you a tax advantage on the front end and on the back end. It's a strategy to save money today while working and to save money in retirement when you are not. Most won't advocate pulling money for a Roth for emergencies, although it is possible to do so.

[Mr Nice Guy]

Right, but what is the advantage vs. going all 401k up to the max then Roth? Is it so you can take out what you put in in an emergency?

No way! Don't ever expect to take ANYTHING out of your RETIREMENT accounts.

I think why they are saying fund the ROTH after you fund 401k up to the match, is because the ROTH is tax sheltered.

[kork13]

Right, but what is the advantage vs. going all 401k up to the max then Roth? Is it so you can take out what you put in in an emergency?

Not really. Basically, you fund the 401k up to the limit of the match your employer gives, because that's free money (immediate 100% ROI). That amount normally won't be very much, so move next to the Roth IRA, because that money will grow tax-free. Once the Roth's are maxed, then you move back to the 401k because it's your last option for a tax-advantaged retirement account.

I can see your point, though, if your concern is to lower your taxable income. If that's more important than the Roth's alternative advantages, then maxing the 401k first could be a valid move.

[disneysteve]

Right, but what is the advantage vs. going all 401k up to the max then Roth? Is it so you can take out what you put in in an emergency?

If you know you will be putting away the max - 17K in the 401k and 5K in the Roth - it really doesn't matter. If, however, you might be investing less than 22K during the year, I'd rather see money go into the Roth where you have unlimited investment options and typically lower fees and much more control.

[Bades]

Best plan is to match employers 401k, then max out IRA, then put anything left over back into 401k?

I dont get the company match until 1 full year of service (aug 2012) - should I not be putting anytyhing into my 401k at the moment and divert it to an IRA?

[Bades]

Basically it sounds like if you can't max out your IRA, don't go above the percentage your employer will match you on your 401k?

Sounds right to me...

[disneysteve]

I dont get the company match until 1 full year of service (aug 2012) - should I not be putting anytyhing into my 401k at the moment and divert it to an IRA?

Personally, I'd say yes. All things being equal, I would invest in a Roth before I invested in a 401k with no match. Of course, there are some significant tax differences to think about between the two since one is pre-tax and one is post-tax.

[Frugal45]

If you know you will be putting away the max - 17K in the 401k and 5K in the Roth - it really doesn't matter. If, however, you might be investing less than 22K during the year, I'd rather see money go into the Roth where you have unlimited investment options and typically lower fees and much more control.

That makes sense. I was just curious what the advantage was to moving back and forth, what you said makes perfect sense.

[Hector]

Seems like you are interested in tax differed accounts only. I would do following in that situation.
Max out your 401k first.
After that if you want to put more money towards tax differed retirement account, put $5000 to your wife's regular IRA. Since your wife is not contributing to her 401k, she would be eligible have regular IRA and can take tax advantage on it.

[humandraydel]

That makes sense. I was just curious what the advantage was to moving back and forth, what you said makes perfect sense.

The advantage boils down to tax diversification. If you KNOW that your tax rate at retirement will be less than it is now, then investing in a 401k is better. If you KNOW that your tax rate now is less than it will be at retirement, then investing in a Roth is better. The general consensus is that tax rates will go up in the future, but individual circumstances also come into play - how old are you? currently married? kids? are you in an upwardly mobile career where your interest rate will increase drastically in the future?