One or two retirement plans
**Question: **I have a 401k through my job that matches 6% of my contributions. Additionally, I have a Roth IRA that was opened some years ago but has been sitting dormant while I was finishing my master's degree. I currently contribute 6% to the 401k but I would like to start saving a full 10% of my salary for retirement. Would I be better off stashing the additional 4% in my 401k or should I put the remainder in the Roth?
Thanks, Jason, Raleigh, NC
Answer: I've learned over time that the answer to your question doesn't really come from running the numbers and making some reasonable projections. Instead, I'd think about how disciplined are you in your money habits.
But first, remember this: You can't go wrong with either choice. You're being smart about your retirement savings. Period.
There's a good case to be made for your strategy of putting the remainder of your retirement savings into a Roth-IRA. Between the 401(k) and the Roth you'll build up a nice nest egg and you'll pick up tax diversification along the way. You'll defer taxes upfront with the 401(k) contributions and pay your ordinary income tax rate when you withdraw the money. The Roth contributions are with after-tax dollars but the earnings are tax free in retirement.
Problem is, even in this era of automated savings I've known far too many people who end up waiting until the last minute to make their Roth contributions, skip making contributions in some years, not paying attention and running afoul of the income limits on the Roth, and so on. Our intentions are good. Our follow though less so.
That's why I often favor focusing first on putting the maximum into the 401(k). Once you've told human resources to hike your contributions the increase goes in automatically. Your retirement savings contributions are on auto-pilot so long as your with your current employer.
In other words, do the 401(k)/Roth tango if it's practical for you. Otherwise, put the maximum into the 401(k). And when you get your next pay raise and you're still under the income limits put some of the money into the Roth.
I'm curious. Does anyone have an experience on this issue. What did you learn?