Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

11/06/2009
Getting maximum benefits from employer matching funds for 401(k)
I'm wondering about putting enough [money] in your 401(k) to get your employer match and then putting the rest of it in a Roth. And I'm wondering if you could elaborate on that. If I max out my 401(k), there's usually nothing left for the Roth. And so I was going to see what you would suggest. I work in the public sector, where there is no match. So in that case, would you suggest putting everything in a Roth? And if so, why?
Steven Rodriguez:
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My advice is to continue to max out your 401(k), even if your employer does not provide a matching contribution. If after maxing out your 401(k) you have funds left over, then yes, go ahead and contribute to a Roth IRA; however, I would not lower my 401(k) contributions just so I have money to contribute to a Roth, the reason being that your 401(k) contributions lower your taxable income, which can have a significant impact on the amount of taxes you currently pay.
Gail V. Marquet:
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Investing in a company 401(k) is a good idea, even if the employer doesn't match. Ideally, one should be saving 15% of one's annual income for retirement. The individual would need to investigate (and probably seek) financial counsel on the types of funds in the 401(k) and what their earnings have been over the last 10 years. If the funds have a good return, then they might invest 3-5% in the 401(k) and the rest in a Roth IRA with good mutual funds.
Gary Silverman, CFP:
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Without a match, your choice comes down to whether you want a tax deduction now (401k contribution) or tax-free growth (Roth). This decision needs to take into consideration your current and future tax status, the types of investments you tend to make (aggressive, conservative, or something in between), and the length of time you will keep the money invested. Roth's, IRAs, and 401(k)s are types of accounts, not types of investments. As such, you can within the accounts invest in very conservative, very aggressive, or a mix of investments.

All of that leads to your needing to talk with someone who will learn about your specific situation and explain in the detail you want the pros and cons of each choice you are facing. My bias is to recommend you find an advisor who is not trying to sell you a particular product or brand. Absent that, you can continue to learn the nuances yourself and become your own advisor.
Pablo M. Bianchi, CFP:
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The allocation of assets should be based on tax bracket and eligibility to participate in a Roth, also if you are disciplined to save money on your own. Many times a defined contribution plan like a 401(k) or 403(B) is a great choice, because the money is saved before you get it in your hands. As far as your match, in my opinion it should not be a factor, as you will need to have sufficient assets to fund your retirement regardless of your employer's matching contribution. It certainly will be nice if they do offer a match, as it will help you meet your retirement needs.
Joan Koonce, Ph.D:
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If the person has no employer match with their 401(k), then I suggest putting the money into a Roth before putting it into their 401(k). Contributions and earnings in a Roth are tax-free in retirement while contributions and earnings in a 401(k) are tax-deferred (taxes are paid in retirement). If a person has an employer match in their 401(k), it is probably better to put money in the 401(k) first, so they can receive the additional retirement contributions from their employer.
Rosemary Ervin, CPA:
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If there is a match, take it, as it represents an increase in salary. If there is no match and you qualify for a Roth, you will not get a current tax break, but in the long run, you may pay less tax. It is a function of your household income now and in retirement. You need to learn about the time value of money. Be aware that your employer is required to provide you with financial counseling annually, so make an appointment when the advisor comes to your place of business. Ask for websites where you can learn about investing and consider your timeline--how long you have to save--and what your current tax situation is. Have your questions ready; provide the counselor with current statements of your savings. You do not have to buy what they are selling, but you can learn from what they have to say. Good luck.