<#-- Rebranding: Header Logo--> <#-- Rebranding: Footer Logo-->

Should I contribute more to my 401(k) and Roth IRA to reach my deferral limit in a given year?

I contribute enough of my income to my 401(k) plan to get the maximum match from my employer. I also have a Roth IRA that I occasionally contribute to. Contributing to both of these isn't enough to get me to the deferral limit for any given year. I have more than six months of emergency funds. Should I contribute more to my 401(k) plan or to my Roth IRA? Should I open up a brokerage account as well so that I can reach my deferral limit?

Retirement, 401(k), IRAs
Answers
Sort By:
Most Helpful
December 2017

Without knowing all of the details of your overall assets, age, and plans, I cannot give you sound advice.  That said, normally the younger you are and the lower your tax rate, the more attractive a Roth becomes.  But since you have 6 months of emergency funds, you obviously save on the outside fairly adequately.  I would have those "emergency" funds invested somehow other than savings accounts because in this low interest rate environment you will not even keep up with inflation and have guaranteed losses on purchasing power.  Over time, this can decrease your overall wealth potential.

If you are at a higher tax rate, then you should consider putting more into the 401k, especially if you are older.  This way you would be able to put more money in due to the tax savings.  If you are at a lower tax rate and are younger, then I would max the Roth out first & then add any additional amounts towards your 401k.  Again, this is a generalization without knowing your details.

Hope this helps and Happy New Year, Dan Stewart CFA® 

December 2017
December 2017
December 2017
December 2017