Max 401k or Fully Fund Roth?

[t-dog]

so its that time of year to start thinking retirement. I can either fully fund my 401k ($16,500) but then only partially fund my $5,000 contribution to a Roth or fully fund the Roth and get close but not all the way to fully funding the 401k.

Which would you focus on given the options?

[t-dog]

I should have mentioned that my 401k has a 3% automatic contribution by my employer even if I contribute nothing. So I am looking at the IRS definition of fully funding which means $16,500.

[souldoubt]

The general consensus going back to advice on the MSN boards was to fund your 401K so you get the full possible employer match, then fully fund your Roth IRA, after that fully fund the 401K and if there's anything left start a taxable account.

Assuming your 401K is a traditional 401K (not contributing to Roth 401K or company doesn't have one) I would recommend maxing the Roth IRA.

[SVT]

If you have a HSA you should contribute to that before the Roth and 401k.

[jd2005]

Assuming your 401(k) is traditional, then I second wxyz. If your 401(k) is Roth, and you like the investment options in there, I would fully fund the 401(k) first.

[qofcc]

What tax bracket are you in?

[Deleted]

I second qofcc's question.

[t-dog]

I am in the 25% bracket - I have a traditional IRA, Roth IRA, 401K, and defined benefit plan. Just trying to figure out in what order they should be maxed out to the extent possible.

[qofcc]

If you were in the 15, I'd say go for the Roth so you can lock in at the lower tax bracket while you have the chance, but the 25 is harder. Unless you end up with a much higher income in retirement, you're probably not going to be in a higher tax bracket, so I'd lean towards the 401K. The Roth is good if you think you'll save much more money than you'll need in retirement because you can avoid minimum distributions. It's also good if you're not totally committed that the money is for retirement and you might want to withdraw some of it for buying a home or investing in real estate or starting a business or something. It also allows you to invest in any funds or stocks you choose. With the 401K you have the option to borrow against it, but not withdraw and you have much fewer investment choices.

[blackdiamond]

I am in the same situation as jenr but my company offers a 401K Roth. Right now I can't make contribution but come August 2012 (if all goes well) I will be eligible. Right now I use use the Roth and a brokerage account as my retirement vehicles. Would I be better off contributing to to the 401K Roth?

[souldoubt]

Even in the 25% bracket I'd recommend fully funding your Roth IRA. The federal government has trillions in unfunded liabilities on its books. You can't predict future tax rates but I think there's a damn good chance they may go up because Uncle Sam will hve to come up with more revenue down the line. The 401K will require minimum distributions and depending on tax rates and how much someone has to take out (dependent on age, balance) that could put them in a somewhat higher bracket than they anticipated in retirement, especially if they've been maxing the 401K contribution at times.

Personally I'd rather fully fund my Roth IRA and not quite fully fund my traditional 401K but that's just me. No required minimum distributions and not being taxable income make the Roth IRA more advantageous as the tax and spending situation in the US is anybody's guess 10 or 50 years from now.

[Deleted]

Can maxing out your 401k move you down to the 15 tax bracket?

[t-dog]

gin - excellent question, but no - maxing my 401k will not drop me to the 15% bracket. Not sure if that is a good or bad thing

[Deleted]

Apr 7, 2011 14:38:34 GMT -5 t-dog said:

gin - excellent question, but no - maxing my 401k will not drop me to the 15% bracket. Not sure if that is a good or bad thing

Even counting your personal/standard deduction?

[t-dog]

Gin - if I max to the full 16500 on the 401k and with my qualifying widower status I barely dip into the 15% bracket - if I max the Roth and can't get over 14k on the 401k I remain in 25% - might be time to cut back elsewhere for that little bit to drop into the 15%.

[Deleted]

Apr 7, 2011 15:31:31 GMT -5 t-dog said:

Gin - if I max to the full 16500 on the 401k and with my qualifying widower status I barely dip into the 15% bracket - if I max the Roth and can't get over 14k on the 401k I remain in 25% - might be time to cut back elsewhere for that little bit to drop into the 15%.

I would, but if you can't max out the 401k and then use the Roth.

[phil5185]

if I max to the full 16500 on the 401k and with my qualifying widower status I barely dip into the 15% bracket - if I max the Roth and can't get over 14k on the 401k I remain in 25%

The tax difference between 15% and 25% on your marginal $2500 ($16.5k - $14k) is $250. I would base my decision on which choice will make the most long term money, rather than saving $250 today.

[formerexpat]

. The federal government has trillions in unfunded liabilities on its books. You can't predict future tax rates but I think there's a damn good chance they may go up because Uncle Sam will hve to come up with more revenue down the line.

The government could easily neutralize this equation by decreasing benefits [via COL freezes, or further income limitations], increase the FICA tax or increase the retirement age [or a combination of the three]. None of which would require an adjustment to the federal income tax rates.

I'd recommend funding the Roth IRA for the reason Phil gave. I'd rather pay $250 today [or $500 if you fully fund the Roth] to save much more than that when you can withdrawal the earnings tax free in retirement.

[Deleted]

People, he is saving in his roth no matter what, it was which one he should max. I would think decreasing your tax bracket when he is paying into the roth would be a good idea.