401k vs Roth IRA

30 May 401k vs Roth IRA


Written by Matt Wegner
Founder and Lead Counselor, Matt Wegner Coaching, www.financialexcellence.net

I am often asked what type of retirement accounts are the best to invest in. With all the options available (see our previous article on retirement options), this question seems to stump a lot of us. Here’s what I recommend to most of my coaching clients.

401k┬ávs Roth IRA – What’s Best for You?

Once you are debt free (except the house) you are ready to invest 15% of your total household income in retirement accounts. My first choice is always a retirement plan with a company match. Invest the maximum amount that receives the company match. This is typically around 6% of your income. To invest the remaining 9% of your income, I recommend Roth IRAs. Most singles or couples will be able to invest in Roths, but income restrictions do apply. IRAs have many more investment options than 401(k)s or 503(b)s so you have more control over your future. Roths are also very powerful because when you retire, ALL of your retirement distributions are tax free. It is generally better to pay taxes now on your current income, knowing that when your nest egg matures, you will have a higher income with no taxes (assuming you start early enough on your retirement savings). After maximizing your contributions in the Roth IRA, I recommend the rest of your 15% into either a traditional IRA or back into the 401(k). Again, the IRA gives more investing options than a 401(k).

So what types of investments do you want in the retirement fund? Mutual funds give you diversification by spreading your money across many different companies. Different types of funds invest in companies from different asset categories. I generally recommend investing equal percentages in Growth Stock mutual funds, Aggressive Growth mutual funds, International mutual funds, and Growth & Income mutual funds. If you are getting closer to retirement age, you may consider purchasing some Balanced funds as well. Within each of these categories, look for funds with a long term (10 yrs or longer) track record of success, preferably higher than a 12% return. This is a fairly simplistic approach, but it?s a great start for the average investor.

Scholars will debate the effectiveness of different approaches, but the reality is that very few of us are actually saving for retirement. With nearly 70% of all consumers living paycheck to paycheck, the important thing is to do something. To borrow from the Nike slogan, Just Do It! Having a plan and executing it puts you well ahead of the vast majority of our nation.

– Matt Wegner

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