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Should I invest into my 401k (100% matched at first 3%) or should I invest into a Roth IRA? Or split ?

I am 24 years old. I have minimal debt besides my mortgage. I feel I should take advantage of the 3% and just contribute the 3% then start a ROTH IRA with the remainder.

Apr 13, 2013 by Brad from Land O' Lakes, FL in  |  Flag
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11 votes

Hi Brad,

You may be right on target, depending on a few assumptions. First of all, the 3% match is free money and should not be passed up, except in unusual circumstances. You did not mention a Roth option in your 401(k) plan, so I am assuming it does not exist. If you are not sure, check with your plan administrator or in the plan's Summary Plan Description. This could be an attractive option for you if available.

The calculation of which type of contribution (pre-tax 401(k) contributions or Roth IRA contributions) to consider next is an extensive one, with many variables (future vs current tax rate, assumed rate of return, other sources of retirement income, for example). In your case with a possible 35+ year time horizon, the tax free Roth option would very likely be the next most attractive to you. However keep in mind, there is an income phase out on the ability to invest in a Roth IRA. In 2013, for single filers, your ability to contribute to a ROTH IRA is phased out as your adjusted income reaches the range of $112,000 - $127,000. If you are married filing jointly, your ability to contribute to a ROTH IRA is phased out as your adjusted income reaches the range of $178,000 - $188,000. If your income exceeds the limits above you can get around the ROTH income limitations by making a non-deductible traditional IRA contribution and then converting it to a ROTH IRA.

The 2013 Roth IRA contribution limit, under the age of 50, is $5,500. If you would would like to contribute more to your retirement in 2013, you could consider increasing your 401(K) contribution over the 3% matching threshold up to $17,500, if your income equals or exceeds that amount.

So in summary, your priority may likely be the 3% matched 401(k) contribution first, the Roth IRA contribution next (if under certain income levels) and finally additional 401(k) deferrals depending on your income level and ability to contribute.

Hope this helps. Mark Lavallee

Comment   |  Flag   |  Apr 13, 2013 from Warwick, RI

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8 votes

Hi Brad! Mark is spot on. Contribute to your 401(k) first up to the match amount, then to a Roth IRA up to the maximum. Then, more to the 401(k) as income allows. Since you are young, starting now can put you on track for a positive retirement. It sounds like you are already doing the right thing by keeping your debt low. Be sure to budget your money each month to get the most out of your spending and your savings.

Comment   |  Flag   |  Apr 15, 2013 from River Hills, SC

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4 votes
David Fabian Level 19


I completely agree with Mark's very detailed assessment of the 401(k) and Roth IRA options that you have available to you. He gave great advice there so I won't re-tread on those comments. I would definitely recommend fully funding the 3% in your 401(k), then max the Roth IRA, and lastly putting additional dollars into the 401(k) if you are able to save to the max. Definitely don't pass up the free 3% money!

One additional consideration is that with the 401(k) you are restricted to simply a few investment choices (usually 15-30 funds) that are typically on the expensive side. In addition, these employer sponsored plans can also restrict the number of times you can move in or out of each investment in a given year. The drawback to these plans is that they aren't as flexible as a self directed retirement account.

When you contribute money to your Roth IRA you will be able to invest those funds at any discount brokerage and have access to virtually every security in the marketplace. You can buy stocks, bonds, ETFs, or mutual funds and trade as often as you like. Having that flexibility and transparency will give you greater freedom over your investment decisions.

Comment   |  Flag   |  Apr 15, 2013 from Irvine, CA

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Kudo's to the great answers above...

The only thing I might add, and you've probably already considered this... "Is the rest of your financial house in order?" While I might assume it is, and your only concern is the question posed above, ask yourself the following; "Do I have enough money in my emergency fund (3 - 6 months income)? Do I have adequate Life Insurance in place to cover my debts and replace my income (if you have a spouse or children)? Have I started an education fund for my children (if applicable).

Best of Luck, Rod

Comment   |  Flag   |  Apr 19, 2013 from Springfield, MO

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