Roth IRA helps lower tax risk

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Dear Dr. Don,
My employer contributes 10.2 percent to a 401(k) regardless of any contribution on my part. I am currently only willing to put 10 percent annually toward my retirement (which seems fine, since it’s a total of 20.2 percent). Would it be better for me (age 32, income $70,000) to max out a Roth IRA at $5,000, with the remaining $2,000 going into the 401(k)?
— Casey Contributes

Dear Casey,
I like the opportunity for tax diversification, with you contributing to a Roth IRA instead of into the 401(k) plan. However, if your employer offers a Roth 401(k) plan at work, you can contribute more than the $5,000 contribution limit of the Roth IRA by contributing to the Roth 401(k).

Because the employer’s contributions can’t be made into the Roth 401(k), you’ll have 10.2 percent of your salary invested on a tax-deferred basis, taxable when distributed out of the account, and your after-tax contributions to the Roth 401(k) or Roth IRA distributed tax-free in retirement.

The Bankrate feature “Roth 401(k): newcomer at work” discusses the differences between 401(k) and the Roth 401(k), and points out some of the advantages of the Roth 401(k). However, you should also discuss this decision with your tax professional.

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.