Roth IRA vs Employer matched 40lK

[Guest Janie H.]

Should I invest in a Roth IRA or put the money in an employer matched 401K plan? The match is on a percentage basis & the money is distributed to the plan & then among the participants. I am not sure whether I should branch out to a Roth IRA or keep the money in mutual funds through the 40lK.. any suggestions/advice would be appreciated. Thank you.

[John G]

You can do both !

If your available cash to invest is limited, the choice is harder to make. Both systems have various advantages and disadvantages in terms of distributions and taxation.

A Roth is under your control and you have a near unlimited number of investment options, while some employer plans are more restricted. However, the employer match substantially boosts the first year return. For example, many employers match 50% of your contribution which is what you might make in a Roth after four years of compounding. So, you may want to take advantage of the maximum amount of match, but if you have additional cash to invest put the extra in to a Roth. One reason to consider adding the Roth option would be to solve any diversification problems you see in the company program.

[MWeddell]

The efficiency of saving through a Roth IRA is the same as saving through a 401(k) or traditional IRA if one makes several assumptions: tax rates remain constant, the taxpayer remains in the same tax bracket, investment rates of return are the same in all vehicles, the same amount is saved, Roth IRA money is used for the appropriate purposes, liquidity is not an issue, transaction costs are equivalent, and perhaps one or two others I've left out. If an individual's circumstances differ from the above assumptions, then it'll tilt the balance for or against Roth IRAs.

However, if one adds a match to the advantages of savings through a 401(k) plan, then usually this will tip the scales in favor of saving first in the 401(k) plan at least to the extent needed to earn the full match. If you want advice specific to your situation, then talk to a financial planner.

The above post is right, one can contribute to both a 401(k) plan and a Roth IRA. That tax break is phased out I believe starting at $150,000 for married couples and $95,000 for individuals.

[John G]

Weddel is correct that you can craft a scenario where there is no difference between 401k and Roth IRA. And I agree getting professional advice is useful, but one of the big problems here is our limitations in predicting future events, not just 5 years out but 30+ years into the future.

Think about what you expected for the year 2000 from five years ago and ten years back. Any surprises? Like Roths didn't exist 5 years ago. Tax rates changed. Promoted? Switched jobs? Change in marrital status? Did you move?

It can be pretty embarassing just how far off the mark our own personal predictions can fall. With regard to Roth/401k comparison, the longer the time period (30+ yrs) and the higher avg annual rate of return the more likely that the Roth option is superior. Why? Because as retirement assets grow it is more likely for tax rates to bump up higher and the withdrawal timing flexibility becomes more valuable.

[Guest Janie H.]

wow.. You both have given me soo much to think about. Both replies make so much sense. I talked to a financial adviser today (what a coincidence.. ) and he suggested I branch out to a Roth.. I am still undecided. I have a substantial amount in my 40lK.. and I just made a sale on some property & that is what I am wanting to invest into a Roth (well, the maximum I can invest) or into mutual funds/stock/bonds/CD's. etc... With this being a bear market right now I am not sure it is the time to invest, however, on the other hand prices are at the lowest & it is a good time to buy.. Guess it is true with the Roth, too.. Life is a chance & sometimes we just have to get lucky with the hand we have to play.. Thanks to all the responses, I am going to weigh the pros/cons & then go from there. Again, THANKS for the input.. It is very much appreciated.

Jane