-- Greg Groundfloor
If your employer offers a matching contribution to your 401(k) plan, then I'd suggest that you contribute up to the limit of the matching contribution before you start thinking about funding a Roth IRA. If the employer contributes 50 cents for every $1 you put in, you're making 50 percent on your contributions to the plan -- up to the limit of the match.
When an employer offers matching contributions, it's typically 50 cents per $1 contributed by the employee, up to 6 percent of salary. You're now contributing 8.5 percent of your salary, so even if there is a match you could easily dial back your 401(k) contributions and shift some of your retirement savings into your Roth IRA.
With a Roth IRA, you fund the account with after-tax dollars, and qualified distributions out of the account are tax-free in retirement. In contrast, your 401(k) contributions are tax-deferred, and you'll owe income taxes on the qualified distributions out of the account in retirement.
There's also the ability to withdraw up to $10,000 from a Roth IRA as a first-time homebuyer. In general, the account has to have been established and funded for more than five years for the account owner to utilize the first-time homebuyer provision and not owe a 10 percent penalty tax on the distribution of any investment earnings. If you're not planning to buy a home for at least five years, you could move some of the $12,000 you have in savings into the Roth IRA. You just have to stay below the annual contribution limits for these accounts.
In general, it makes sense to fund a Roth IRA if you expect to be in a higher tax bracket in retirement than you're in when you fund the account. You say you're in that situation. Just don't ignore the "free money" aspect of any employer matching contributions to your 401(k).
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