Dear Dr. Don,
I currently have both a 401(k) through work and a Roth IRA. I contribute $350 (per) month to the Roth IRA and just over $500 (per) month to my 401(k).
My company is employee-owned, so it deposits some of the stock into the 401(k). But there is no matching. Would it be better to stop additional deposits into the 401(k) and just load up my Roth, or vice versa? I have about $3,000 in the 401(k) and $12,000 in the Roth IRA invested in four different funds.
-- Brent Buttress
Dear Brent,
You need to make sure that the company's contribution of stock to your 401(k) plan isn't a form of matching contribution before deciding to stop contributing to your company plan. Firms can make the matching contribution in company stock. The plan administrator or the human resources department would be able to answer that question.
You're contributing about $850 per month right now to the two accounts. The Roth IRA is funded with after-tax dollars, and the 401(k) is funded with pretax dollars. You're not quite fully funding your Roth IRA, but it's close enough that you wouldn't be able to funnel much of the 401(k) money into the account even if you can take advantage of the catch-up contribution allowed for those who are 50 or older.
A spousal Roth IRA may be another way to increase your contribution limit. See IRS Publication 590, "Individual Retirement Arrangements," for the last word on eligibility and contribution limits.
This is all really not an issue if you cannot contribute more than the 2009 limit of $5,000 to a Roth IRA for an eligible taxpayer younger than 50. You're contributing $4,200 annually to the Roth IRA. Step it up to $5,000 and keep contributing to your 401(k).
In general, the decision to use a Roth IRA versus a tax-deferred retirement account comes down to comparing the tax rate you currently pay with the tax rate you expect to pay in retirement.
For younger workers in a low tax bracket, it can make perfect sense to invest up to the limit of the company match in the 401(k), then, if eligible, fully fund a Roth IRA. Then, if the monthly budget permits, consider additional contributions to the 401(k).
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