As you’ve read in other posts, I’ve talked about the importance of a 401(k) as well as a Roth IRA. Many clients have asked which one do I do over the other. A basic rule of thumb is if you do have a 401(k) that does have a match, take that first. The reason being is that that is free money and there’s no reason to pass up free money. Most 401(k)’s only match up to a certain percentage, so at least contribute as much as they match.
After the free money, Go for the tax-free money
If you have satisfied that and you still have more money to save, then let’s shift gears and let’s take a look at the Roth IRA. With the Roth IRA, you are allowed to put in up to $5,000 a year, $6,000 if you’re over the age of 50. Our goal then is to max out the Roth IRA after taking full advantage of the free match in the 401k retirement plan. Once the Roth is completely maxed out, then we come back to the 401(k) before we max that out, which is $15,500 per year up to $20,500 after over the age of 50.
Another case for Diversification
To further support this strategy is the simple principle of diversification. Most 401k’s have limited investment options. By opening a Roth IRA, you can then do investment options that are unrelated to your 401k, thus diversifying your portfolio even greater. This is strategy that did in my Roth when I used to have a 401k with my previous employer.
Ahead Of The Game
If you’ve managed to max out both your 401(k) and your Roth IRA, well, you’re definitely ahead of the game, and after that we can discuss further options that you could possibly consider.
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