| Q: I am trying to decide if opening and contributing to a | | | | have a combination of 401K and Roth IRA accounts, |
| Roth IRA would be a better option than contributing | | | | you have greater flexibility in choosing which account |
| over and above what my company matches in my | | | | to withdraw from, which could allow for tax planning |
| 401K. | | | | opportunities to help minimize your taxes during your |
| A: Ideally, it's best to max out both your 401K and Roth | | | | retirement years. |
| IRA accounts; the more you can save for retirement | | | | One more note regarding taxes: 401K, traditional IRAs, |
| the better. However, for many people this is not | | | | and other employer sponsored retirement plans are |
| possible, so the question then becomes which account | | | | subject to the Required Minimum Distribution rules; Roth |
| should I invest in first? | | | | IRAs are not. Again, having Roth IRAs in combination |
| Generally, it's best to invest in your 401K plan first, up | | | | with your 401K accounts can provide tax planning |
| to the amount your employer will match, then to invest | | | | opportunities not available to people who only have |
| in a Roth IRA. If you have additional funds to invest | | | | 401K accounts. |
| after making the maximum contribution to your Roth | | | | Withdrawals - your contributions to a Roth IRA are |
| IRA, you should max out your 401K, and then invest in | | | | available to you penalty and tax-free at any time. Your |
| taxable accounts. There are always exceptions, | | | | earnings in a Roth IRA may also be withdrawn at any |
| however, so here are some points to consider when | | | | time. There is a 10% penalty, but this penalty may be |
| deciding the best order to invest your retirement funds: | | | | waived under certain circumstances (disabled, first time |
| Matching Contribution - many employers will provide a | | | | homebuyer, qualified higher education expenses and |
| matching contribution when you elect to participate in | | | | more). Withdrawals from a 401K plan are much more |
| the company 401K or other employer sponsored | | | | restricted, as employers may or may not allow early |
| retirement plan. This is free money, and should be | | | | withdrawals or loans. |
| taken advantage of even if your 401K plan isn't the | | | | Automatic investments - contributions to your 401K |
| best due to poor investment choices, high expenses, | | | | account are automatic since they come directly from |
| etc. There is no matching contribution for a Roth IRA, | | | | your paycheck. This makes investing in your 401K |
| so you should invest in your 401K up to the matching | | | | easy and convenient, and after you've started |
| contribution first, before you invest in a Roth IRA. | | | | contributing, most likely you'll no longer miss the money |
| Investment Choices - Most 401K plans have a limited | | | | being invested. Investing in a Roth IRA takes more |
| number of investments to choose from. Roth IRAs | | | | effort. Although many Roth IRA custodians will allow |
| can be opened just about anywhere: mutual fund | | | | you to setup an automatic investment plan from your |
| companies, brokerage firms, banks, etc., which means | | | | checking or savings account, it takes more discipline to |
| your investment choices are unlimited. If your 401K plan | | | | invest in a Roth IRA than it does to invest in a 401K |
| has limited or poor investment selections to choose | | | | plan. If you think you don't have the discipline to invest |
| from, the Roth IRA may be the better choice (after | | | | in a Roth IRA account, then investing in a 401K plan |
| you contribute enough to get the matching contribution | | | | (even a poor 401K plan) is better than not investing at |
| in your 401K plan). | | | | all. |
| Taxes - although your 401K contributions are | | | | Conclusion: Everyone's situation is different, and there |
| tax-deferred, which allows more of your money to go | | | | is no one specific order for retirement investing that is |
| to work for you, money invested in a Roth IRA grows | | | | perfect for everyone. However, investing in your 401K |
| tax free. As long as you follow the rules, you may | | | | up to the matching percentage, and then opening a |
| never pay taxes on the earnings in a Roth IRA. If you | | | | Roth IRA is a good strategy for most people, as a |
| expect to be in a higher tax bracket when you retire, | | | | combination of 401K and Roth IRAs could provide you |
| this could result in substantial tax savings. | | | | with the best of both worlds. Both types of accounts |
| Because withdrawals from a 401K account are taxed | | | | have many benefits which can allow for flexibility and |
| at your ordinary income tax rate, withdrawals could | | | | planning opportunities when it comes to withdrawals |
| potentially push you into a higher tax bracket. If you | | | | and taxes, both before and after you retire. |