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max out 401K or roth IRA

Posted on: 15th Dec, 2006 07:26 pm
Hi, should I max out my roth ira and put remaining cash in my 401k or max out my 401k thereby leaving only a little for the roth ira?
Hi Hansel,

Neither should one max out his Roth IRA and put the remaining in 401k account nor should one max out his 401k leaving some cash for the Roth IRA. I feel that both the plans are required.

If your employer matches your contribution to the 401k plan, you can contribute as much as possible so that you get the maximum match from your company. This is because what you are getting is free money or stock. Now, if there is any savings left over, you can open an IRA account.

Posted on: 16th Dec, 2006 12:41 am
Most people contribute a maximum amount into their 401k Plans and the rest is invested into the Roth IRA. This is because the former is made with pre-tax dollars and the latter with after-tax dollars. So, the return on investment into the 401K account is higher than that of others.
Posted on: 16th Dec, 2006 12:10 pm
Hi Hansel,

There is a marginal tax rate to be considered. I mean whether you benefit by maximum contributions into a 401K or an IRA depends on the tax rate at the time of your retirement.

If the tax rate in future is same as it is now, the 401K plan gives higher return than that of the Roth IRA for the same amount invested into both the plans. This is so because the former involve pre-tax dollars while the latter uses after-tax dollars.

However, if the tax rate goes up in the later years, then the return from the 401k plan is much lower than the return from the Roth IRA. So, going for only a 401k account is not always a good choice. Instead, one can have both the accounts and invest the money into each considering the tax bracket and making some presumptions. You can consult a tax advisor for this purpose.

As there isn't any way to be sure as to which plan is the best for you, it is better to have two accounts. It's not just enough to invest your money into one single account for your retirement years.


Posted on: 17th Dec, 2006 03:44 am
But Caron, Roth IRAs have a number of advantages compared to 401Ks. One can withdraw contributions and not earnings any time without penalty unlike a 401k. Where estate planning is concerned, the Roth IRA allows one's dependents to withdraw cash from the account without any taxes being paid. The primary reason is that the money invested into the Roth is the cash on which one has already paid taxes.


Posted on: 17th Dec, 2006 04:00 am

"But Caron, Roth IRAs have a number of advantages compared to 401Ks
Yes, there are advantages but one should not ignore the tax bracket. 401k requires pre-tax contributions and later on the Internal Revenue Service gets the taxes deducted from the money you take out from the 401k account. So, if your tax bracket at that time is higher than it is now, you get a lower return compared to the Roth IRA. And in a Roth IRA, taxes are deducted from your account earlier when you invest money into the account.


Posted on: 17th Dec, 2006 04:12 am
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