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Where would you put leftover cash after you fund your 401k and if you have no debt?

I fund my 401k with 10% or more of my income, receiving a 3% match. I have no debt other than a mortgage, where should I place extra cash other than checking and savings accounts which return next to nothing?

Jan 11, 2012 by David from Columbus, OH in  |  Flag
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3 votes

In addition to a ROTH IRA, you should see if your company provides a ROTH 401(k) option. Based on your income, expenses, etc., this might provide you with additional contributions beyond the ROTH IRA limits. If you are over the ROTH income limits you could still qualify.

The only downfall could be expenses. Check to see if your company has a Brightscope entry. If the expenses are low and the investment choices good, then this may be an option.

Comment   |  Flag   |  Mar 21, 2012 from Permanente, CA

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Barry Rabinowitz Level 19

Hi: you should max out at 16,500 if you are under 50. Any other monies can be invested- after you have a rainy day fund: equal to 1 years living expense. You can open an individual brokerage account at Schwab or Fidelity and invest in low cost/expense ETF's. Your asset allocation- would depend on your age and risk tolerance.

2 Comments   |  Flag   |  Jan 11, 2012 from Fort Lauderdale, FL
Victor Guettlein, CFP®

I would also ALWAYS recommend a Roth IRA if you are eligible.

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Flag |  Jan 12, 2012 near Arvada, CO
Barry Rabinowitz

If you expect to be in the same tax bracket in retirement you would be indifferent betwwn

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Flag |  Jan 12, 2012 near Fort Lauderdale, FL

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Let's not lose the Forrest for the trees here. The Roth / Traditional is not the central issue here .Goals are. The first step is to think about goals... what are you investing this extra cash for? College for kids? Your own Retirement? Long term wealth accumulation? Another short term Goal? ( For example if you are investing to have a down payment for a summer house in 2 years, checking and savings may very well be the right place - and it wouldn't go into an Roth or any other type of IRA) What's your time horizon?? More information is needed. When your goals are clarified, we can then focus on investment policy: The mix stocks, bonds, cash How much volatility are you comfortable with? Do you want to manage your extra money yourself or outsource to an advisor? Best of luck! Evan

Comment   |  Flag   |  Mar 22, 2012 from Port Washington, NY

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A Roth IRA is a great option because it provides you with tax-free growth and distributions. An often overlooked tax benefit of a Roth IRA is that since distributions are tax-free, they do not pile on top of other taxable income sources such as required minimum distributions (RMD's) from other retirement plans, Social Security, and pensions - so they can actually help you stay in a lower tax bracket in retirement. Furthermore, you are not required to take money out of your Roth IRA if you don't need it, unlike other qualified plans that require annual distributions after age 70. In many cases, I often recommend that individuals consider diverting any excess 401k contributions that are above the company match into a Roth IRA unless they can max out both anyway.

Comment   |  Flag   |  Jan 12, 2012 from Arvada, CO

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All of the above are great answers, however it all depends on what Barry said. If you are going to be in a lower tax bracket or the same when you retire the Roth really doesn't mean much. i like the emergency fund and low cost ETF idea. Exchange Traded Funds have very low fees, very low turn over and can be taxed at long term capital gains. I prefer to have some money in a regular taxable brokerage account for opportunities and liquidity purposes.

Comment   |  Flag   |  Mar 21, 2012 from Loveland, OH

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A ROTH IRA is most likely the best place for any excess savings, for a number of reasons.

The "rule of thumb" advice, that a ROTH and traditional IRA are about the same if an investor is going to be in the same or a lower tax bracket at retirement, is not always correct and is often times dead wrong. Take the case of a married couple, both under age 50, 42% marginal tax bracket, no existing IRAs, and not eligible for deductible IRAs or ROTH IRAs due to income limitations. If the couple has an extra $20,000 of after-tax income available for savings, then each person could contribute $10,000 to a non-deductible IRA --- $5,000 for 2011 before April 15th and $5,000 for 2012--- for a total of $20,000. The IRAs could then be immediately converted to ROTHs with zero tax liability.

In 15 years time, with a 6% annualized rate of return, the regular IRAs would grow to a combined balance of $47,931, the same nominal value as the ROTH IRAs. However, there would be an embedded tax liability on the traditional IRAs, equal to the current value less $20,000 (the non-deductible contribution amount) times the prevailing tax rate. At every level of tax above zero, the traditional IRA is worse than the ROTH. In other words, whether tax rates decline 25%, 50%, or 75% --- the ROTH leaves you with more money after taxes. You can model this scenario with an online calculator developed for this purpose at http://roth.northcapital.com.

Consider your own particular circumstances, and check with your tax advisor about your eligibility for IRA or ROTH contributions. If you find the analysis is too complicated to do on your own, consider working with a fee-only advisor to help you determine your best course.

Comment   |  Flag   |  Mar 21, 2012 from San Francisco, CA

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