Dear Dr. Don,
I have a 401(k) plan that I have been maxing out for the past two years. I was told that a Roth IRA is the better way to go. Can you tell me where can I open an account -- at my local bank or online? Also, where is the best place to put my money?
-- Shahin Selects
Dear Shahin,
It may make sense to choose a Roth IRA over a 401(k), especially if your company doesn't have a corporate match on the 401(k). To make the right decision, you'll need to weigh whether you'll be better off contributing after-tax dollars into a Roth IRA (which will not be taxed in retirement) than you are in contributing pretax dollars into a tax-deferred 401(k) account (which will be taxed as ordinary income in retirement).
If you're eligible to contribute to the Roth IRA, you can open an account through a bank, brokerage or mutual fund company. The best option will depend on how you want to invest the contributions and several other factors, including your attitude toward risk, the projected fees and expenses in the account, and the investment choices.
There's not one best choice; just a choice that's best for you.
The temptation in the current market environment is to hide out in cash or CDs and to avoid stocks or stock mutual funds. However, CDs and cash investments tend not to keep pace with inflation over time. Investments that don't keep pace with inflation lose purchasing power.
If you decide to dial down the risk to principal, you need to ramp up your contributions to your retirement accounts. That's going to be difficult, as you already are maxing out your 401(k) contributions and your eligible Roth IRA contributions are less than the 401(k) limits.
At a minimum, you should contribute up to the limit of any company match on the 401(k) plan. Then, if you're eligible, contribute to a Roth IRA account. Income limits on Roth IRA contributions for the 2009 tax year are available in the IRS release "IRS Announces Pension Plan Limitations for 2009":
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $159,000 to $166,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $101,000 to $105,000.
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