Where to contribute.

**Russ** · 03-09-2011, 07:09 AM

I think I have this right but I'm asking to be 100% certain.

Our company has done away with the pension plan and they now match up to 6%. So, of course I'm maxed there but I also signed up for an automatic increase of 1% every year.

The question is: Put that 1% in a traditional 401K or Roth?

I put it in the Roth. Right?

**Greebo** · 03-09-2011, 08:16 AM

Originally Posted by Russ

I think I have this right but I'm asking to be 100% certain.

Our company has done away with the pension plan and they now match up to 6%. So, of course I'm maxed there but I also signed up for an automatic increase of 1% every year.

The question is: Put that 1% in a traditional 401K or Roth?

I put it in the Roth. Right?

You want to put the first 6% in whatever provides a match - typically the conventional 401k.

After that, if available to you based on your income, the next choice is the Roth, up to the max of $5,000/yr ($6,000 if > 50 iirc).

The reason you move to the Roth next is to hedge against tax variations as you get older. The Roth has a fairly low cap on how much you can invest now and NEVER pay taxes on later (since it's post tax money) so you would only NOT pick the Roth first if you have something that guarantees an even better return - and a match on the 401k does just that.

Once you cap the Roth, go back to the 401k up to its max of $16,500 (iirc) or until you hit your target %. If you hit the cap and still want to invest more, you'll need to explore more conventional, non tax favored options.

But as I recall you still have a HELOC - and maybe some other debts that aren't mortgage debt? If that HELOC is < 50% of your gross income, I would not put more than the match away for now - get that debt eliminated first before you go beyond the 6% matching amount.

**Russ** · 03-09-2011, 09:34 AM

I'm no where near the max contribution on the Roth, so that's a non-issue.

As for the non mortgage debt...
Truck - 10,000 left @0%
HELOC - 12,000 left at 3.25% (current market)

I know to get rid of the debt first and I want to. However, I know what happens when I make that effort.
I took into consideration my recent pay increase of 3+% and decided I won't miss the 1% of that in my snowball.

**Telephus44** · 03-09-2011, 10:17 AM

Russ, are you talking about a Roth 401K or Roth IRA?

**Russ** · 03-09-2011, 10:24 AM

Roth 401K.

**Telephus44** · 03-09-2011, 10:50 AM

I would go with the Roth option, unless you're on the cusp of losing something tax related (our AGI is in the sweet spot where we start to lose some tax deductions, so we put more into a 401K than we otherwise would to keep a few). My reasoning for you to put additional money in as a Roth is partly for the longer term tax savings, but also a "don't put all your eggs in one basket" approach. Who knows what the tax rules will be for 401K's and Roths when we retire? I have my retirement funds in both to cover myself.

FWIW, my husband has all of his contributions in a "normal" 401K, and I have all of mine in a Roth 401K.

Another big plus for us, not sure of your tax situation, is that we're getting close to making enough money to not be able to contribute to a Roth IRA. A Roth 401K has no income limits. Also, you can only contribute $5000 to a Roth IRA whereas in a Roth 401K you can contribute up to $16500.

**Greebo** · 03-09-2011, 12:09 PM

Originally Posted by Telephus44

I would go with the Roth option, unless you're on the cusp of losing something tax related (our AGI is in the sweet spot where we start to lose some tax deductions, so we put more into a 401K than we otherwise would to keep a few). My reasoning for you to put additional money in as a Roth is partly for the longer term tax savings, but also a "don't put all your eggs in one basket" approach. Who knows what the tax rules will be for 401K's and Roths when we retire? I have my retirement funds in both to cover myself.

Any politician who tried to change the rules on 401ks, IRAs and Roths which contain *OUR* money (not SSA money) would find themselves out of office at best come next election season - so I don't worry too much about these accounts. Remember, these accounts are not held by the Gov't - they're held by private institutions and simply regulated by the Gov't.

FWIW, my husband has all of his contributions in a "normal" 401K, and I have all of mine in a Roth 401K.

THIS could bite you.
When you hit mandatory withdrawal age, each of you will be forced to take out money as individuals. This means you, with exclusively ROTH money, will be forced to take out money that can't be taxed *first* and you really want to be drawing off taxable income first before you touch Roth money.

ROTH first, for sure - but not ROTH only if you can avoid it.