Reader Mail: Company Matches and Roth IRAs

A reader asks:

I have a somewhat specific and possibly stupid question: I found your posts on 401(k)s and IRAs really helpful, and while you gave great advice about traditional IRA vs. Roth, I’m not sure how to choose between 401(k) and Roth IRA? My company matches up to three percent in my 401(k), so hell yeah free money, that’s what I’m currently enrolled in, but should I roll it over into a Roth IRA? You gave pretty compelling evidence in your IRA post about how Roths are superior to pre-tax IRAs, but what about the whole matching issue?

We don’t have a formal advice column yet, but we’re more than happy to take your questions. I’m not a “financial advisor” so I’m not going to tell you how to invest your money, that said, this question is an easy one!

This is a thing that I have done, and what most smart money people recommend: If you are lucky enough to work at a company that provides a 401(k) plan and a company match, contribute just enough money to get the full match, because yes, free money! Once you get that done, open a Roth IRA and contribute the maximum for the year, which is $5,000 if you’re younger than 50. And then if you’re this amazing person who still has more money to put away for retirement, go back to contributing to your 401(k) until you max that out. Most young people won’t get to this last part where you max out the 401(k) because the max is $17,000, and most people aren’t saving $17,000 a year. If you are, whoa, you’re amazing and will be a very rich old, and all the other olds will be jealous of you.

We’re not here to just to answer these “traditional” questions about money (but we will if that’s what you want!). Want advice on what to do when your friend owes you money, but you don’t know how to bring it up because you feel awkward about it? Or what to do when the guy or girl you’re dating practically lives at your place but isn’t paying rent? We love those questions. Send us an email!

 

Photo Credit: Flickr/Solo with others

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4 Comments / Post A Comment

bloodorange (#105)

Actually, there such a thing as a Roth 401(k), too! A quick Google seach yields some more info: http://www.smartmoney.com/retirement/planning/understanding-the-roth-401k-17679/ The non-profit I work for does 401(k) matching, and I opted for the Roth – if that’s an option for you, that might be the best of both worlds.

Mike Dang (#2)

@bloodorange Yes! Thank you for this! If your company offers a Roth 401(k), that’s something to consider, though the match will go into a separate account that will be taxed during retirement. Some companies don’t want to deal with this, so they don’t offer a Roth 401(k), but your company’s payroll or HR person should be able to explain their offerings to you.

travelmugs (#162)

Can I get a tip on how to actually open a Roth IRA, or IRAs in general? I remember being overwhelmed with paperwork when I started my job and the benefits kicked in, so I’m currently putting more than the match amount in the default 401(k).

Who would I even talk to about opening an IRA? My bank? The HR people at my work? Is there a website for it?

Mike Dang (#2)

@travelmugs We have a “How To” section! This one will help you out!

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