Are there any benefits in contributing to my employer's 401(k) as opposed to my individual Roth IRA if my employer doesn't match my contributions?
I opened a Roth IRA years ago before I was enrolled in a company 401(k) plan. I now work for the State of California and I am enrolled in a 401(k) plan. However, the 401(k) plan does not match my contributions. Are there any benefits in contributing to my employer's 401(k) as opposed to my individual Roth IRA? Is there one that I should focus on first?
Generally speaking, if there is no employer match, I recommend contributing to a Roth IRA instead of the employers plan. You'll have more investing options at (usually) a lower cost.
A few situations that may make the 401k a better option:
1. Creditor protection is better in a 401k plan vs. a Roth IRA. If you have a creditor issue, a 401k may be a better option.
2. Access to a high-paying stable value fund in the 401k plan. I've seen 401k plans with a grandfathered stable value fund paying 5%! It's hard to pass that up for the cash portion of your portfolio.
3. Access to institutional-class shares in the 401k plan. Sometimes the costs of these shares are lower than what you could access on your own, especially if you're just getting started with investing.
4. Obviously, if you're over the income limit for a Roth IRA, go with the 401k instead.
Great question and best of luck. Be sure to follow up if you need more information.
Since your employer doesn't match contributions, in most cases it makes sense to contribute to the Roth IRA first. You'll have vastly more investment options and typically lower costs. One thing you do forego with a Roth IRA is creditor protection. If you have credit issues it could be smart to contribute to the 401(k).
After you've maxed out your Roth IRA you could then start contributing to your 401(k). You may also consider using the traditional 401(k) so you're building two buckets of retirement funds, pre-tax and after-tax. Which comes in handy when it's time to make distributions in retirement, providing more flexibility and control over taxes.
First, would would like to ask for the oppertunity to talk live with you / webinar.
We pretty much always advise our clients:
- If there is no company match, then skip it.
- Max Fund your Roth
- **Take advantage of what the tax code offers: Section 7702a MEC contracts
**This is a max funded life insurance policy. We only recommend a AAA rated carrier, and a company that dosen't partcipate in "Direct Recognition" (we can explain)
** Not all folks can qualify for life insruance based upon current health. It is not an exact science. You don't purchase life insurnace with your money, but rather your health.
So, the answer to your question is just not super cut and dry, let's talk.
Brett M. Sause, LUTCF®, LTCP®, CLTC®, RFC®, LACP®, FSCP®
Principal & CEO
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You live in a venue with a high state income tax. If your taxable income is $85,000, you are looking at a 34% combined marginal rate. That argues for the utility of the immediate tax deduction afforded by traditional 401k contributions. Keep in mind, that your 401k plan design likely allows for after tax ROTH 401k contributions. This allows you to make Roth contributions that grow tax-free and which are NOT means tested. You can alternate from year to year if you like. And if you separate from service later, you can roll the Roth 401k into your old Roth IRA.
California's Savings Plus program offers you a self-directed brokerage account to manage your 401k, whether it be traditional or Roth. There is a wide array of low cost index funds available in this program. Schwab itself owns several index mutual funds and ETFs that have among the lowest costs in the industry. Consider their Total Stock Market Index (SWTSX) with 0.03% of management fee.
Bottom line: Californians should be fairly aggressive with taking tax deductions while working there. The tax rates they pay are high. You can still do Roth contributions within the framework of a 401k. Do both. And use index funds available in the self-directed brokerage option available to state employees.
There is no universal rule on how best to make the retirement savings because it’s so individual-based. However, the rule of order is first to make the HSA (Health Saving Account) contribution due to its triple tax advantages, followed by Roth (tax exempt), then the 401k.
In your case, since your employer does not match your savings to the 401k, fund the Roth first. Then make the contribution to the 401k to reduce the tax burden. But if you’re in the low tax bracket now, you may want to contribute to a Roth 401k, instead of the traditional one. Best!