Roth IRA to supplement 401(k)?

I know this topic has been covered before so I’ll try and keep it simple. I know the two IRA’s have a major difference (when the taxes are taken out). I get a 401(k) through work and get a small match, and I also contribute typically 10-15% or more depending on the time of year (I’ll bump it up when I’m getting paid double time for holidays).

I think for my age I’m doing ok with where I’m at for a 401(k) so I’m thinking of starting a Roth IRA just to have my retirement funds a little balanced for the whole tax thing. If for some reason I find myself in a worse tax situation, whether it’s due to a good retirement income stream from my 401(k) or the tax policies at the time of my retirement, I’m thinking being able to draw some from a post-tax Roth would be nice also.

Anyone done something similar, or have thoughts about what I’ve mentioned?

I always treated my Roth like a lottery. Put a little money into an aggressive fund every year and when I’m old enough to cash in, I cash in big with 0 taxes.

This is a great site to learn about the best way to withdraw funds and when, depending on how much effort you want to put into it. I plan on doing Roth conversions for 2 or 3 years until I start collecting pensions and social security.

https://www.early-retirement.org/forums/f28/roth-conversion-guide-106285.html#post2506403

https://www.early-retirement.org/

I do the same I have a 401k that has a small match and then I invest into a Roth account at my local credit union. I also play in stocks a little bit. On my own

I contribute enough to my 401k to max out both the regular and catch up contributions, have done so since the house was paid off. I also have a Roth IRA and max out both the regular and catch up contributions. Amazing what paying off the house, vehicles, having the kid off the payroll does for your financial position.

We started contributing 10% to our 401k when first married and have maintained that pattern. You don’t notice it when it was never in your disposable income. Wish we had started the Roth accounts sooner (first available in 1997).

2021 limits for 401k contributions are $19,500 for regular contributions and $6,500 for catch up contributions. 2021 limits for Roth IRA contibutions are $6,000 for regular and $1,000 for catch up.

The Roth IRA income maximum for 2021, modified adjusted gross income must be less than $125,000 if single or $198,000 if married and filing jointly. Contributions begin to be phased out above those amounts, and you won’t be able to put any money into a Roth IRA in 2021 once your income reaches $140,000 if single or $208,000 if married and filing jointly.

I would only contribute to an IRA if already maxing out your 401k ($19500). The employer match and tax benefits typically make it the best option. Beyond that, even if you exceed the income limits, there is still an option that allows you to contribute to a conventional IRA then do a rollover into a Roth. It’s only $6k per year, but I do it for both my wife and I, so just a little something extra.

Roth contributions unlike 501k are limited by your taxable income. You have to look into how much or even if you are qualified to contribute.

This is a regret I have, I wish I would have contributed to a roth first back in my 20s. I didn’t realize that I would be cut out of Roth contributions.

Grouse

Make sure to do whatever you can to maximize the company contribution if it’s set up on a variable based on your personal contribution. You will be forced to take RMD (required minimum distribution) out of your 401k at some point (72?). The Roth funds have no required distributions and will come out tax free. Let’s face it, taxes probably aren’t going to go down. I suggest looking at the rate on return on both (don’t forget tax on 401k both as reducing tax burden now, but paying it later) and see which will give you the most bang for your $. That answer will be a reason to fund one prior to another.
Just my $.02.

Another idea is to convert your 401k to a Roth. My wife and I did that when a job change substantially reduced my income. I ended up in a much lower tax bracket and ended up paying pennies on the dollar to convert all of our 401k into Roth.

Contribute enough into 401k to get full company match, then max a Roth, then go back to company 401k. Company 401k plans tend to have higher fees and less options, with a Roth you have unlimited options and can buy ultra low cost index funds of your choice. Also remember that you can withdraw Roth contributions without penalty in case of an emergency.

Of course a guy can eliminate all discussions and arguments and just max them both!

Always max your free contributions on a 401k first, than yes, a Roth is great to have. I’d put as much as allowed into a Roth. Slight investment hack regarding a Roth, if you can afford to put your max in at the beginning of the year, you’ll increase you’re earnings substantially.

…of course, this is just what I’ve researched and by no means am I a professional investor so take it with a grain of salt.

Have you ever looked into a back door Roth? It’s a work around for high income earners.

bfishn wrote:

Contribute enough into 401k to get full company match, then max a Roth, then go back to company 401k. Company 401k plans tend to have higher fees and less options, with a Roth you have unlimited options and can buy ultra low cost index funds of your choice. Also remember that you can withdraw Roth contributions without penalty in case of an emergency.

Of course a guy can eliminate all discussions and arguments and just max them both!

Nailed it. If you can contribute to a Roth, do that first thing after you max out your employer match.

Having retirement funds spread out across accounts with different withdrawal tax rules is a good idea. I agree with getting the 401k match, maxing out an IRA, then going back to the 401k if able. Of course if you have minimal fees and access to low cost index funds in the 401k the discussion might change. I don’t know a ton about it (younger and only focused on the roth) but there are situations where a traditional IRA makes more sense then a Roth tax wise (not just because of income limits). It has to do if you are close-ish to retirement and anticipating a lower tax bracket than you currently are in etc.

I’m no expert, and did not stay at a Holiday Inn last night so I’ll refer you to some extremely good references for the DIY investor looking for low cost and easy.
https://www.bogleheads.org/wiki/Main_Page
https://www.bogleheads.org/wiki/Traditional_versus_Roth

john23 wrote:

bfishn wrote:
Contribute enough into 401k to get full company match, then max a Roth, then go back to company 401k. Company 401k plans tend to have higher fees and less options, with a Roth you have unlimited options and can buy ultra low cost index funds of your choice. Also remember that you can withdraw Roth contributions without penalty in case of an emergency.

Of course a guy can eliminate all discussions and arguments and just max them both!

Nailed it. If you can contribute to a Roth, do that first thing after you max out your employer match.

Nailed it x3. Balancing taxable assets is a good thing. Been doing this for years.

Don’t qualify for Rotch because of higher income? Research back door Roth. Essentially contribute post tax money to a traditional IRA then convert it to a Roth at the end of each year.

I had a later start than I wanted. I basically contributed to a 401k for matching and built an emergency fund. I then did some investing for mid term goal money. Started contributing to a Roth and then maxed it. Payed off all my loans and debts. Followed up by maxing out the 401k and any catch ups. Now all additional funds go to investing.

I approached things in that not all savings were devoted to retirement. I’m in pretty good shape now and should have some flexibility. I have a tax deferred bucket. Tax free bucket. Emergency & liquid bucket. Regular investment bucket that could be used for whatever (next vehicle, property purchase, defer for retirement savings, etc.).

401k to match
max your roth
max spouse roth
finish out 401k

that is the rule of thumb. obviously there are exceptions to the rule but like bfishn mentioned, the 401k fees can be pretty substantial and often the fund options are not always ideal (we were originally with oppenheimer and paid 5.75% on ever purchase, then switched to American funds where we paid 5.75%) eventually after much convincing that our oppenheimer funds and american funds after the 6% were not even coming close to beating their benchmarks, we switched to Human interest who does mostly index funds with a few actively managed options but only charges us .4% AUM.

I am about 9-10 years from retirement. What scares me is what the taxes will be when I start taking withdrawals and how much it will impact my social security.

tegg wrote:

I approached things in that not all savings were devoted to retirement.

I do this also. When I get my very small annual bonus, or holiday double-time, or excess vacation cashed out, etc. I “earmark” some of it for fun money now, whether that’s for new gear, a fishing trip, an ice house rental, etc. I like to go on vacations without adding much to credit cards or anything else. I like to have the money saved up ahead of time.

Thanks to everyone who chimed in. I’ve always had a layman’s interest in finances and almost wish there was a financial section on here for normal working guys to share what works and what doesn’t work for their financial situations. I really do appreciate everyone taking the time to provide advice, share links, and experiences, etc.

Buy Land/real-estate if you can. Best advice I got from my advisor 20 years ago. I don’t think land will depreciate much but it will diversify your portfolio.

DTW

Dan wrote:

<div class=”d4p-bbt-quote-title”>tegg wrote:</div>
I approached things in that not all savings were devoted to retirement.

I do this also. When I get my very small annual bonus, or holiday double-time, or excess vacation cashed out, etc. I “earmark” some of it for fun money now, whether that’s for new gear, a fishing trip, an ice house rental, etc. I like to go on vacations without adding much to credit cards or anything else. I like to have the money saved up ahead of time.

Thanks to everyone who chimed in. I’ve always had a layman’s interest in finances and almost wish there was a financial section on here for normal working guys to share what works and what doesn’t work for their financial situations. I really do appreciate everyone taking the time to provide advice, share links, and experiences, etc.

look at 2 books a random walk down wallstreet by burton markiel and the Little book of common sense investing by Jack Bogle.

if you want to get a little more academic look at the Intelligent Investor by Benjamin Graham.

these are the 3 books that launched my interest into grabbing my investments by the horns and quit being passive. i was able to influence my workplace retirement and felt confident making purchases on my own.

Graham is pretty influential, Warren Buffett and Charlie Munger turned his approach into Berkshire Hathaway. Most of us who read Graham’s works won’t perform quite at that level but there is a lot there for the average investors to apply to their personal finances.

DTW wrote:

Buy Land/real-estate if you can. Best advice I got from my advisor 20 years ago. I don’t think land will depreciate much but it will diversify your portfolio.

DTW

I think everyone wishes they would have bought land 20 years ago. Unfortunately land is always expensive and seems to have even gotten more so as land prices have outpaced wages. I look into it a bit, but man it just seems almost impossible for the average Joe.

I’m closing in on 40, will have my house paid off then and be maxing out all retirement accounts. At that point I may try and figure something out but it would have to be income producing which can be tough if your also trying to use it for hunting. I think I just need to find a gal who comes from a farming family

Don’t even do the math, had you been buying and hoarding gold.

big_g wrote:

Don’t even do the math, had you been buying and hoarding gold.

You’d be broke compared to the guy investing in the market. But I do think some gold is a good part of a portfolio.

http://www.macrotrends.net/2608/gold-price-vs-stock-market-100-year-chart

I’m not nearly as versed as some of you, we just max our employer match which works out to about 10-12% contribution each for my wife and I. Employer match or even partial match is free money as far as I see it, and is a much better option than a Roth, if you have to choose between the two. Plus a couple properties, and hopefully a couple more soon, and we should be setup well for retirement. I’m certainly not counting on Social Security.

BigWerm wrote:

<div class=”d4p-bbt-quote-title”>big_g wrote:</div>
Don’t even do the math, had you been buying and hoarding gold.

You’d be broke compared to the guy investing in the market. But I do think some gold is a good part of a portfolio.

http://www.macrotrends.net/2608/gold-price-vs-stock-market-100-year-chart

I’m not nearly as versed as some of you, we just max our employer match which works out to about 10-12% contribution each for my wife and I. Employer match or even partial match is free money as far as I see it, and is a much better option than a Roth, if you have to choose between the two. Plus a couple properties, and hopefully a couple more soon, and we should be setup well for retirement. I’m certainly not counting on Social Security.

yeah if your employers matches the first 5-6% (half of 10-12) maxing that out is important. But because many work retirement plans are pretty expensive and many have crappy fund options, A roth for anything past the match is the way to go. free money invested poorly while still usually better, is still invested poorly.

hnd wrote:

yeah if your employers matches the first 5-6% (half of 10-12) maxing that out is important. But because many work retirement plans are pretty expensive and many have crappy fund options, A roth for anything past the match is the way to go. free money invested poorly while still usually better, is still invested poorly.

Agreed, I was referencing the less than match, which seems to be more and more common from the people I talk to. I.E. Employer matches 3% and $0.50 on every dollar there after, in that situation you are *probably* still better off taking that free money rather than no match on a Roth. Tough to make up that 50% return of “free” money. But I’m not a financial advisor, so I could be wrong, esp in certain scenarios.

oh yeah, its hard to get even the people at our office to sign up for the 401k. they’d rather have their 125 bucks a month go in their pocket then 250 into their 401k (we match just 3% and avg salary is 50k)

We offer a simple IRA with a 3% match. I tell my guys it’s free money and they look at me with the deer in the headlights stare. 33% take advantage of it.

Years ago at work our company would match up to $1,250. I knew a guy that would put in just enough to get that matched, then cash it out. Even at the unfortunate 10% or whatever early withdrawal penalty, that’s literally free money. Sounds so cliche but yeah, it’s an employer benefit and if you don’t do it you’re literally just leaving money on the table.

It’s because of that my advice to those younger than me is always very simple right away regarding retirement accounts: Have one. Sounds so dumb and simple but you can’t make up for lost time, and having any form of one early on is so much better than not.

Depending on how much you make, it may be easiest just to elect the Roth 401k option through your company plan (almost all offer it today), unless of course you want to open up the investment options/play stocks/etc, then go with a cheap online brokerage. We generally guide clients that regardless of age, if you fall under the 12% taxable income threshold of ~$80k/year for a married couple (appx $104k gross) it’s a no brainer, all Roth all the time. For those in their 20s, 30s, and even 40s, I can make a case for the Roth even if they step into the 22% and 24% brackets, assuming they aren’t disqualified by income. On that note, Roth 401ks have no income limitations, so some folks that foresee themselves in a high bracket forever will opt for the Roth just to bite the bullet now and be done with it. Back door option works fine as long as you don’t have any SEP, SIMPLE, or traditional IRA accounts outstanding.