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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January 2018

Hello,

I hear your dilemma!  When you consider all financial matters (pre-tax saving, matching, bills to pay, tax to set aside…), what was originally a simple goal--saving for retirement--suddenly becomes very complicated.  Consequently, you become paralyzed and hesitant to make any decisions.

Fear not! Here’re the simple rules of thumb: 1) If work provides a matching in a retirement account, please make the most of it.  It is the free money for you, why not? 2) Next, max out your own IRA (Roth or Traditional).  You’re counting on the principal of time value of the money in this instance. 3) Do an HSA (health savings account) if you have a high deductible health insurance.  Not only you can deduct it, but you can also invest it.  Don’t use it now as you still have earned income to meet all medical expenses.  Use the HSA as your future retirement healthcare fund when you don’t have any earnings besides the social security, if it still exists.  4)Tackle debts.  Yes, you save for yourself first before tackling debts unless you have a very unreasonable high interest rate. 

If you still have confusion or questions over those rules, talk to a CFP®.  All of my colleagues, myself included, can definitely help you build a budget and guide you to pay down debts and build the retirement fund.  Best!

 

January 2018
January 2018
January 2018
January 2018