The company does contribute 3% of my annual compensation into my 401K, whether or not I contribute anything. Other than the higher limit to the contribution, is there any other advantage? My husband says the funds that I have to chose from with the 401K plan are TERRIBLE. He has been much more successful with managing our own IRA funds. Should I invest my maximum with my own IRA, and then any excess amount I'm able to contribute into my 401K? (I'm 56, hubby is 61- combined gross income varies, 80K-100K, since he is self-employed)
Donna, the answer is...it depends! If you are disciplined and truly redirect your retirement savings to an outside Roth IRA with low cost investment vehicles to your maximum contribution and then redirect excess back to your 401(k) to reach your maximum contribution with your "catch up" contribution then more power to you! Unfortunately, few have the discipline and systematic savings advantage that a payroll deduction provides. One thought is to do both simultaneously.
Donna, you're way ahead of the game by asking this question. If your employer does not match your 401k contributions, then I would recommend that you contribute the maximum to your IRA and any excess to your 401k.
401K Contribution Limits 2012: $17,500 / $22,500 for people 50 or older 2013: $17,500 / $23,00 for people 50 or older
Maximum Contribution Allowed to All of Your Traditional and Roth IRAs 2012: The lesser of $5,000 ($6,000 if you’re age 50 or older), or your taxable compensation for the year. 2013: The lesser of $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year.
In regard to your husband's observation, unfortunately he is correct about many 401k plans. Too often 401k plans offer a limited number of investment options at a high fee to the employee. If you're not doing so already, I suggest that you think of all of your IRA and 401k accounts as one portfolio rather than each one separately.
For example, if the 401k offers a good core bond fund, you could designate the 401k for this purpose and then use your other IRAs to hold other investments. This requires some strategic thinking and some homework to compare your the offerings in the 401k and IRAs, but it sounds like you and your husband are up to the task. Best of luck.
Donna - Yes, the higher contribution limit is definitely the biggest advantage of your 401k versus an IRA. And, the idea of contributing to your IRA prior to the 401k is not a bad idea either. Lastly, I would recommend you go to your employer and ask for an improved plan. At the very least see if they would consider adding a self directed brokerage option so you can invest in any fund you want. Just an idea! Good luck! Marcus
It is certainly possible that your investment choices are terrible. There is also a possibility that the investment choices are limited and bland. 401(k) investment choices are often selected to allow an unsophisticated investor to be able to invest in all major investment classes while minimizing exposure to the more risky investment choices. Often, they will offer ‘asset allocation’ models. Your husband may prefer a wider range of investments that he can actively and/or selectively trade. If this is the case, you can still invest in all the major asset classes in the 401(k), just not in the manner your husband prefers.
With that said, there is no compelling reason to invest in the 401(k) until you maximize your Roth. There are nuances to each type of plan; for example, a 401(k) may allow you to take loans. A Roth does not require RMD’s. But to the substance of your question, that does not appear to be relevant.
You can contribute up to $6500 for 2013, into the Roth, and invest it with your husband’s advice. After that, if you are still able to save more, I would recommend you consider contributing to your 401(k). Unless the investment choices are, in fact, terrible, you should be able to select an acceptable asset mix. Payroll deduction into a 401(k) is a great way to save, and regardless of whether you contribute to a pre-tax or Roth 401(k) account, it is still a tax-advantaged account that you can benefit from.