Retirement Investing ? IRA vs Roth vs 401k? (Scenario Inside)

[TygGer]

I?ve been doing a lot of research lately and can?t determine if a traditional IRA or Roth IRA would be better. In most examples, a Roth results in a higher value given the same initial investment. Ok, I?m swaying away from the real issue at hand?

Let?s take my scenario for example.

My company has a 401k plan where they will match 80% up to the first 5% contribution. The obvious thing to do is to contribute at least 5%. Everyone agreed? (It?s free money) The max contribution beyond the company match is 18%.

Below is the dilemma, which Scenario would you choose and why?

Scenario 1:
-Contribute to company 401k to max percentage they will match. (In this case, it?s 5%.)
-Anything you want to contribute beyond 5%, contribute to a Roth. Roth max contribution is $3000.
-And then if you still have money left to invest (anything over the $3000 to Roth) should be contributed back to the company 401k (This amount will not be matched by my company, but it is tax deductible/deferred)

OR

Scenario 2:
-Contribute to company 401k to max percentage beyond what they will match. In this case, it?s 18%, but they will only match the first 5%.)


I would imagine that Scenario 1 would realize more profit.

What do you guys think? Or, what would you do?

 

[GasX]

In my case, I would forego the Roth and just pump the 401K.

Managing investments accross multiple accounts is a pain in the ass, which is why I am consolidating my 6 retirement accounts down to 2.

 

[Viper GTS]

Definitely the first option. Maximize company matching, max out the Roth IRA, then what you do from there is really up to you.

Viper GTS

 

[rufruf44]

To get an accurate answer, tax rate is needed, as well as whether the max contribution to your 401K will push you down to a lower bracket or not?
Traditionally a Roth IRA is for people that expected to retire at a higher tax bracket than their current one, while the traditional IRA is for exactly the opposite of that. Although if you're already past the maximum income limit to deduct your traditional IRA, a Roth will be a no brainer.

 

[FeathersMcGraw]

Unless you really hate the options provided by your company, I would always contribute to a 401(k) over a Roth. 401(k) contributions are paid in pre-tax dollars, which reduce your taxable income (which in turn reduces your taxes, which should give you slightly more to invest in a separate IRA). Also, your IRA contributions are capped at $3000 (I can't remember if they increase to $3500 for 2004 or not), while the 401(k) caps at $12000K (again, I can't remember if the 2004 limit has increased or not). Investing early and regularly is a far bigger benefit to your retirement savings growth than the tax benefits you get at withdrawal.

Ideally, you should use both vehicles to the fullest extent possible.

 

[Nanotech]

Scenerio 1 b/c the Roth provides you with an excellent return and it discourages you from taking that money out in the future until it fully matures. Also, if your young which it sounds that you are a Roth with $2000 in it at age 22 could turn into well over $500000 by the time you are able to take it out w/o penalty and all tax free!

 

[rufruf44]

Originally posted by: Nanotech
Scenerio 1 b/c the Roth provides you with an excellent return and it discourages you from taking that money out in the future until it fully matures. Also, if your young which it sounds that you are a Roth with $2000 in it at age 22 could turn into well over $500000 by the time you are able to take it out w/o penalty and all tax free!

Thats what they said about social security too. Already there's a proposal by the Democrats to tax Roth distribution (I think sponsored by Gerphard (sp))

 

[Jzero]

Generally, the 401k being a "tax shelter," I would max the 401k and then dump the rest in a Roth.
But whatever you do, make sure you get all of the "free" money.