Should I contribute to both my 401(k) and Roth IRA, or just focus on my IRA?

My employer offers a 50% 401(k) match, up to 3% of a minimum 6% pre-tax contribution from the employee (total 18% per month in savings, pre-tax, including the match). I can get within a couple hundred dollars of maximizing my Roth IRA contributions ($5,500/year). I contribute the minimum required to get the maximum match, and maximize contributions monthly to my Roth IRA. Given the fees for the 401(k), (I pay 0.04% for my Roth IRA) and its performance, which at best matches the S&P 500, does it make sense to still contribute to both? Or should I just focus on my IRA and use the extra cash in my paycheck to do other things (build savings, pay debt, invest elsewhere, etc.)?

401(k), IRAs
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4 days ago
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Great question, and congrats on doing a great job in saving for retirement.  I would continue to at least contribute the 6% to your company's 401(k) to receive the match.  The match is free money, and I can't think of a situation where that would not be the right thing to do.  After that, you can max out your Roth IRA account.  At a recent JP Morgan Conference we discussed this exact topic, so here is the typical priority that I suggest to clients:

  1. Emergency account (3-6 months of living expenses)
  2. 401(k) savings to maximize employer match
  3. Additional payments on higher interest loans (i.e. credit card debt/student loans with interest > 6%)
  4. Health Savings Account (if eligible)
  5. Additional 401(k) savings up to the maximum contribution
  6. Additional payments on lower interest loans (i.e. student loans with interest < 6%)
  7. IRA contributions (if eligible)
  8. Taxable accounts

Since you are concerned about high fees in your 401(k) then in step 5 replace that with maxing out your Roth IRA.  I think the step most often skipped is #4 with the health savings account, but these really can be beneficial.  Hope this was helpful, good luck to you!

3 days ago
2 days ago