Contribute to new 401-k or continue with my Roth IRA

[Guest langer]

My company just started a 401-k program and will match 1% of my salary (approx. $1,200). Am I better off contributing new money to this 401-K, or continue to fund my wife's and I Roth IRA. Thanks

[MWeddell]

Presumably, you're asking which is the best alternative. Because these message boards tend to be visited by retirement savings enthusiasts, many of us would say invest in both the 401(k) and the Roth IRAs. The Roth IRAs will be limited to $4,000 total, $2,000 each for you and your wife, for many couples that's not necessarily going to be enough savings to be confident of a comfortable retirement.

The next assumption I'll make is that you and your wife earn less than the $150,000 threshold where eligibility for Roth IRAs starts getting phased out for married couples.

In general, we'd probably say contribute at least 1% to the 401(k) to get the match. After that, it's a toss-up that none of us can resolve without knowing a lot more about your situation. You can read a lot of articles touting Roth IRAs (especially a couple years back when they were new), but the truth is that theoretically, unmatched 401(k) contributions and Roth IRA contributions take you to the same place. Invest now and then tax versus tax now then invest: either way you end up at the same point. It's like asking which is greater, 2 times 5 or 5 times 2?

In practice, things to think about when comparing unmatched 401(k) contributions to Roth IRA contributions are:

- Whether you expect your personal marginal tax rate to rise or fall between now and when you plan to spend your money.

- Whether the investment returns available in your 401(k) plan are likely to be higher or lower than what you might choose from in the Roth IRA.

- Expenses paid by the 401(k) plan assets versus costs of opening a Roth IRA. Don't ignore investment management costs.

- How much is the convenience of payroll withholding for 401(k) plans worth versus the Roth IRAs where you and your wife have to save on your own. However, you can probably arrange for a monthly automatic debit from your checking account to the Roth IRA.

- To what extent do you value having access to your money? One can pull out contributions to the Roth IRA without paying taxes but the 401(k) plan will have more limited access to your funds. On the other hand, the 401(k) plan probably has loans available, which IRAs can't offer.

- Is the money being saved for retirement or for other goals?

- A 401(k) plan gives you better protection in case of bankruptcy, not that many of us would plan for that possibility!

I'm probably leaving out a few other considerations, but that should give you enough to think about. Probably how much you put in and what asset classes you invest in are more important factors in affecting how much long-term savings are generated, so the worst thing to do is delay saving because you can't decide between the 401(k) plan or the Roth IRAs.