ROTH IRA and 401K Thoughts

ROTH IRA and 401K Thoughts

March 19, 2024

If your company offers a matching contribution of up to 6% in a Roth IRA, it presents a valuable opportunity to enhance your retirement savings. Here's what you should consider and do to optimize your retirement strategy with both a Roth IRA and a 401(k) with matching benefits.

  1. Understand Roth IRA Basics: A Roth IRA is an individual retirement account funded with after-tax dollars. Contributions to a Roth IRA are not tax-deductible, but qualified withdrawals in retirement, including earnings, are typically tax-free. This can provide significant tax advantages over time, especially if you expect to be in a higher tax bracket during retirement.
  2. Maximize Employer Match in Roth IRA: Start by contributing at least enough to your Roth IRA to receive the full 6% matching contribution from your employer. This is essentially free money and an excellent way to boost your retirement savings without any additional effort.
  3. Assess 401(k) Investment Options: Evaluate the investment options available within your employer-sponsored 401(k) plan. Look for low-cost, diversified funds that align with your risk tolerance and long-term goals. Consider contributing more to your 401(k) after maximizing the match in your Roth IRA if the investment options and fees are favorable.
  4. Diversify Tax Treatment: Diversifying the tax treatment of your retirement savings can provide flexibility in managing taxes during retirement. By contributing to both a Roth IRA and a 401(k), you create a mix of tax-free (Roth IRA) and tax-deferred (401(k)) retirement savings, allowing you to strategically withdraw funds based on tax considerations and financial needs in retirement.
  5. Review Contribution Limits: Be mindful of contribution limits In 2024, the annual contribution limit for both Roth and traditional IRAs rises to $7,000 for those under 50, and $8,000 for those 50 and above. The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500.
  6. Rebalance and Adjust Regularly: Periodically review and rebalance your investment portfolio to maintain diversification and align with your changing financial goals and risk tolerance. Consider adjusting your contributions based on factors such as income changes, investment performance, and life events.
  7. Consult with a Financial Advisor: If you're uncertain about how to allocate your contributions between a Roth IRA and a 401(k), consider consulting with a financial advisor. They can provide personalized guidance based on your specific financial situation, goals, and retirement timeline.

By following these steps and taking advantage of your employer's matching contribution in a Roth IRA while also considering your 401(k) options, you can create a well-rounded retirement savings strategy that maximizes benefits and tax advantages, setting you on a path toward a secure financial future.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.