401K vs Roth 401k (new for 2006)

[Andy_B]

http://money.cnn.com/2005/07/21/retirement/roth_401k/


Andy

[eltico]

Quick question about the IRA/401(k) dilemma.

I know most of us choose to add to the 401(k) first because the employer will often match whatever we put in (up to a certain percentage of our income). But what if the employer automatically puts 10% of our salary (not out of our paycheck, but as a type of bonus) into our 401(k) at the end of the calendar year (the percentage is dependent upon how well business is, but business is very good right now, so it's likely that I'll get 10% at the end of the year)? Does it still make sense to put money into the 401(k) rather than an IRA?

[peledre]

I'm a big fan of the Roth IRA, and this Roth 401K looks to be even better.

[VFish]

Quick question about the IRA/401(k) dilemma.

I know most of us choose to add to the 401(k) first because the employer will often match whatever we put in (up to a certain percentage of our income). But what if the employer automatically puts 10% of our salary (not out of our paycheck, but as a type of bonus) into our 401(k) at the end of the calendar year (the percentage is dependent upon how well business is, but business is very good right now, so it's likely that I'll get 10% at the end of the year)? Does it still make sense to put money into the 401(k) rather than an IRA?As a general rule of thumb most financial advisors recommend you prioritize your retirement investing in this order:

1) Contribute enough to your 401k to capture your employer match.
2) Contribute to a Roth IRA (up to the max)
3) Contribute to your 401k (up to the max)
4) Invest outside retirement accounts

The Roth IRA limit for 2005 is $4000 ($8000 for you and your spouse if you're married). In your case you should probably max out your Roth contributions before investing in your 401k (unless you need to participate to capture that generous 10% contribution).

BTW, that really is a good deal, you should be sure to thank your company officers/owners.