Increase 401k contribution or open an IRA?
September 18, 2011 7:35 PM   Subscribe

I don't know know anything about saving for retirement other than that you're supposed to do it. I've been trying to educate myself by reading blogs like Get Rich Slowly, but I'm still confused about what I should be doing (if anything) beyond my 401k.

My employer contributes a percentage of my annual salary to a 401k (regardless of employee contributions), and matches a small amount on top of that. I've been putting in 10% of my salary into a traditional 401k. To give some nice, round hypothetical numbers, let's say that I make $50k a year and currently have $100k in my traditional 401k. My workplace offers a Roth 401k, so I just filled out paperwork to change my contributions from traditional to Roth. I want to save some more money -- should I put it into the 401k, or open an IRA?

Here are some facts:
I'm 35.
I'm single, but I live with my boyfriend and we've been talking about getting married (but it won't be in the next year).
Most of my 401k is in one of those target retirement year funds (and 100% of my new contributions go to that fund) -- I had some other funds, but they were eliminated from our plan and they defaulted to the retirement year account.

If I open an IRA:
Should I open a Roth IRA and continue to make traditional contributions to my 401k rather than the Roth 401k? Or both Roth? I know that if I think I'll be in a higher tax bracket at retirement, I should pick Roth, but how the heck would I know that?
Should I avoid the retirement year funds, since my 401k is in one of those types of funds?
Should I open one through my 401k provider (T Rowe Price), or Vanguard, or Fidelity?
posted by anonymous to Work & Money (6 answers total) 18 users marked this as a favorite
 
What you need to do is speak with a fee-based financial planner - someone who is paid by you to advise you, rather than making his living based on commissions on what he sells you. Look at this site to start.

There are legal constraints on people offering this kind of advice outside a one-on-one relationship, so don't be surprised if the responses are sparse.
posted by megatherium at 7:55 PM on September 18, 2011


I concur with getting a financial planner who can hear your whole story and give you advice.

I'm assuming you have future investments pre-retirement in mind though, so instead of IRAs, you may be asked if you like to consider a normal investment account in addition to some IRA option.

Personal opinion: solitary contributions (without company match) are a lonely effort. That money is better off going elsewhere. Who says you won't have the savings from that at retirement in something else of value?
posted by Bodrik at 7:59 PM on September 18, 2011 [1 favorite]


One of the best, straightforward guides to investment I've read is John Bogle's Little Book of Commonsense Investing. That's an excellent resource.

Here are some basic things to keep in mind (at least in my opinion):

1. The more you can put into your tax advantaged investments, the better. So, if it's feasible for you to max out your annual 401k contribution, that's a worthy goal. In 2011, that maximum is $16,500. If you can contribute more money on top of that, put it in a Roth IRA, because you may not be able to take advantage of the tax deductibility of a traditional IRA depending on your actual income level. (Same holds true for Roths, but the phase out level is much higher).

2. But if you can't max out the 401k and are choosing between partially funding your 401k and putting some in an IRA/Roth IRA, as long as you'll fully taking advantage of matching contributions, you might consider the IRA/Roth. The reason is because you're not limited to the investment options in your 401k plan, which are frequently not the best choices. My choice (based on Bogle's advice) is to invest in index funds, which are the lowest fee investments and have performed strongly relative to their peers.

3. Diversify between stock and equity investments, and diversify somewhat within those subcategories. The "retirement age target" fund does this already for you. It's not a bad thing to just shove all your money into something like that, to be honest. And putting your IRA/Roth into one of those funds isn't bad, because you're already diversified by virtue of putting your money completely into those things in the first place.

4. Whether you want a Roth or a traditional IRA/401k now sort of comes down to what you're doing with the money you save by utilizing a traditional IRA/401k. You can theoretically invest more now by using these since they come from pre-tax dollars, but if you just spend these "tax savings" on going out to eat and consumer electronics or just living life, maybe you want to consider a Roth. I invest in Roth IRAs only because the contribution limits are higher and I'm thus able to combine my 401k investments with something else to get the most possible money into tax advantaged plans.

5. There's no meaningful difference between Fidelity, Vanguard, and T.Rowe Price. I like Vanguard, but I have investments with all three. All three have index-type funds.

6. Re: conventional wisdom about "lower/higher tax brackets on retirement." This is sort of a crapshoot. Who knows what the future will hold either for your income or for the tax code. So I don't know how wise it is to make decisions based on this reason.

7. Why did you shift your contributions from a traditional IRA to a Roth IRA? (Not saying this is bad--but wondering why you did this).
posted by MoonOrb at 8:11 PM on September 18, 2011


Can I come at this from a whole different angle? The mechanics of investing are important, don't get me wrong, but far, far more important are knowing how you will react to big financial issues. I'm not a financial planner, and fee-only is the beginning of finding the right one for you (as far as I can tell the rest are half a step above used house salesmen), but these are my thoughts.

The first decision you've made, to contribute to your own retirement at all, is very important. Roughly a quarter of people your age earning your income don't. Give yourself a pat on the back. The worst return on investment is the contribution you don't make at all, so keep up that habit of "paying yourself first."

Second, what will you do when (not if) your accounts drop big time? Like, 50% in six months. My aunt had a big portfolio, enough to support her for the rest of her life, but she panicked and took a permanent 50% haircut when she sold all her stocks at near the bottom of the market. It's easy to say, "What an idiot," but this is highly normal behavior. Humans are mentally built to expect more of whatever came before, so they tend to put in shovels of money when the market has recently gone up, and sell everything when the market has recently gone down. If you're this type (be honest with yourself!), you're better off investing in something more conservative, even if that means accepting a lower return.

Third, what will you do if you lose your job, or change jobs? Many, many people simply empty their accounts when they run out of cash, for whatever reason. After the early withdrawal penalty, they are worse off than if they'd just stuck their money in a CD at the bank. Again, only you can answer these questions, there's no reason to lie to yourself!

Fourth, do you have the interest to manage many accounts with many investments? Some people get to enjoy it, others hate it. Really, a single target date account (assuming you're not getting royally fleeced by your 401(k) options) is probably plenty for someone making $50k. It's much easier to see how much you have at a glance. It's nice to hedge your bets on marginal tax rates, but the way rates are calculated now the brackets for married people are exactly twice those for singles, so why inconvenience yourself?
posted by wnissen at 9:29 PM on September 18, 2011


Everything you need to know about investing in 129 words.

Really. Don't make it more complicated than it needs to be.

Previous Metafilter discussion of this simple set of rules here.
posted by alms at 5:56 AM on September 19, 2011


I'd start watching Suze Orman's show on CNBC and see how you feel about her advice. She typically says to invest in the 401k (usually, traditional) until the match and then max out your Roth IRA after that (assuming credit card debt, etc, is paid off).
posted by getawaysticks at 1:19 PM on September 21, 2011


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