Financial Planning Stuff You Need to Know » 401k

401k vs. Roth IRA, vs Traditional IRA — what should you do?

Chris Long — Fri, 26 Mar 2010 14:32:30 +0000

Many of us face a dilemma: Should I invest in a Roth IRA, my 401k plan, or a Traditional IRA or some combination? Here are some simple rules of thumb:

If you employer matches your 401k contributions:

Invest in your 401k up to the amount to get the maximum match
Then invest in a Roth IRA if you are eligible
Then invest in your 401k again (no match)

If you employer does not match

Invest in a Roth IRA if you are eligible
Invest in your 401k

The situation is more complex if you are not eligible to contribute to a Roth IRA with many contingencies that are best handled on a case by case basis. Also, if your employer has a high cost 401k plan you may actually be better off investing some of your funds outside of your 401k in a regular taxable account once you have invested enough to receive the maximum 401k match.

The reason why Roth IRA contributions are a better bet for most people vs. a regular 401k contribution include:

Tax rates are likely to be higher than they are today in the future when you withdraw your 401k contributions.
You will have Required Minimum Distributions from a 401k plan at age 70-1/2.
Your heirs will required to take distributions from your 401k plan and pay taxes on them. There are no required distributions from a Roth IRA and any distributions are tax free.

The Hidden Costs of Mutual Funds –> Indexing is Better

Chris Long — Mon, 01 Mar 2010 14:52:35 +0000

When I wrote about the advantages of index funds a few years ago I left one out: Because index funds don’t trade as often they generate much lower trading fees vs. actively managed funds. Unfortunately these fees are not included in the expense ratios reported by the fund, so actively managed funds are really at a greater cost disadvantage that you would expect. Check out today’s WSJ for more details

More Attention Focused on 401k Fees

Chris Long — Fri, 08 Feb 2008 17:22:50 +0000

The Marketplace radio show on National Public Radio recently ran a two part segment on 401k fees. They focused on how small employers and their employees don’t understand these fees and how much they can reduce retirement savings.

Of course, the banks,brokers, and insurance companies think the present system is pretty good. After all, if people don’t know what they are paying they are willing to pay a lot!

Listen to Part 1 of the show

Listen to Part 2 of the show

If you are responsible for your small organization’s 401k plan and want to find out how to get a low cost plan with full fee disclosure that’s easy to understand, check out my website for employer plans at http://www.longfinancialplanning.com/for-business-and-non-profits