In article <8ca7475.0312231657.202e25a0[at]posting.google.com> ,
sffleague[at]yahoo.com (sffleague) writes:

- quote -

Generally, after the employer match, one would want to:

- Pay taxes at the time that the tax rate would be the lowest. If you expect
your retirement tax rate to be higher, it is better to pay taxes now and fund
the Roth IRA. On the other hand, if you expect your retirement tax rate to be
lower than your current tax rate, it is better to fund the 401(k) or 403(b) or
make deductible contributions to a Traditional IRA. Being decades away from
retirement, some people suggest a "tax treatment diversification" of both the
401(k) and Roth IRA. Note: if your current and retirement tax rates are
expected to be the same, one doesn't have an advantage over the other because,
per dollar of wages, in retiement one would end up with the same amount of
money after taxes.

- Pay the lowest possible expenses for equivalent types of investments. Since
you have accounts at Vanguard, well-known for their low expense ratios, it does
make sense to fund Roth IRA at Vanguard. (In general, the 401(k) and 403(b)
limit one's inestment options to what the employer allows, but since a Roth IRA
can be at any willing and qualified custodian, the investment universe is
usually much broader with a Roth IRA and one has the freedom to go price
shopping.)

- Flexability of withdrawals. While I don't recommend using a Roth IRA as an
extension to one's emergency fund, if you need to, you can withdraw the
_regular_ _contributions_ at any time, for any purpose, without any tax or
penalty. (The _gains_ would be taxed and penalized, unless one qualifies for
exemption from the penalty or follows the rules for tax-free, penalty-free
withdrawals of the gains.)

- ERISA protection--401(k) and 403(b) plans usually have ERISA protection from
creditors. The protection to IRAs, including Roth IRAs, varies based on state
law. This may be important if either of you are in an occupation that tends to
attract lawsuits.

- Miminim Required Distributions: the 401(k) has MRDs when one turns 70.5 years
old, which might be inconvenient, tax-wise, if you already have a good income
stream from pensions or annuities. The Roth IRA, on the other hand, doesn't
have any MRDs.

- Estate planning issues. My recollection is that people inheriting a Roth IRA
don't have to either take distributions or pay income taxes on the amount, but
you may want to double-check that before relying on it.

The "cookie cutter" advice (which means it might not be the best fit for you,
but seems to fit a lot of people) is generally:

1. Contribute as much to the employer's plan as is matched. If one doesn't
contribute enough to get the match, one is allowing the employer to keep part
of one's compensation.

2. If one still has money to invest for retirement, contribute up to one's
legal limit in a Roth IRA. If married, a "spousal Roth IRA" may also make good
sense.

3. If one still has money to invest for retirement, contribute more to the
employer's plan, up to the legal limit, if it makes sense to do so. (One reason
to not contribute beyond the matched amount is high expenses.)

4. If one still has money to invest for retirement, consider whether to invest
in relatively tax efficient investments in a taxable account, or to pay down
the mortgage. (People who don't have a decent investment strategy but instead
do performance chasing or invest according to their feelings are likely to do
better paying off their mortgage; people with a reasonable investment strategy
and can stick to it for the long run may end up doing better investing in a
taxable account, but investments don't have the certainty of returning better
than the savings from paying down the mortgage.)

By the way, even if you save in exactly the wrong accounts, you are still doing
far better than someone who hasn't even begin to save for retirement.
Congratulations!

Mark A. Young

I've read the recent discussion about using the Roth IRA and it's been
helpful.

My wife works for a very small company and is fortunate that they
offer a 401K program. Unfortunately (to me, at least), all of the
fund options are Oppenheimer and I've never been thrilled with the
choices. Nevertheless, the company's profit sharing plan puts 7% of
her salary into the account each year and she's always added another
(unmatched) $100 per month, which is about 2% of her salary. I put 9%
into my 401K, which has better funds available (a wide selection
including American Century, T Rowe Price, Royce and others).....and
the company matches 20 cents on the dollar for the first 5%. Her
total contribution is about $4300 and mine is $4500.

So here's my question, given the other posted discussion. Would it be
better to take that extra money that she adds to her 401K, as well as
anything over 5% (the unmatched portion) that I"ve been putting into
my 401K, and put that into our Roths instead? I'm just confused about
whether it's better to put as much pre-tax money into the tax-deffered
401K as we can....as opposed to putting taxed money into the untaxed
Roth.

We're both in our late 20s and currently have Roths that are invested
in Vanguard funds. I'd appreciate any thoughts. Thanks!

sffleague[at]yahoo.com