Is It Time To Switch To Roth IRA Contributions

Currently, I contribute all of my retirement contributions via my employer’s 401(k) plan.  I don’t quite max it out yet, though I’m working toward that goal.  However, I’m giving serious consideration to ceasing contributions, and instead contributing to my Roth IRA instead.  Here are a few considerations:

No Match

Right now, my employer doesn’t match anything, so there’s no discernable benefit to contributing even a penny to that plan as far as that goes.  They did a nice match for awhile, but cut it at the height of the recession, and all signs point to a continuation of the ‘no match’ policy.

Tax Considerations

One of the big reasons I’m thinking of switching is because of the eventual tax considerations involved between the two.  According to today’s rules, I’ll eventually have to pay income tax on my 401(k) withdrawls, but not so on the Roth IRA contributions.  Assuming that this policy holds true for the monies in the accounts, I think it would be good to have a balance between the two.

Contribution Amount

mb-money201308Because the 401(k) is pre-tax, whereas the Roth IRA would be post-tax, the up front effect would be that I’d be contributing less.  If I suspended contributions to the 401(k), I would take the resulting difference in my paycheck and contribute that toward the Roth IRA, so the net effect would be zero in terms of my ‘net pay’, though a $400 contribution today could be a $300 contribution tomorrow.

Market Effects

The market has performed so well that the difference has probably worked in my favor.  By contributing more, I’ve been able to take advantage of the gains with the extra money involved.  If I were to switch to a Roth IRA, I’d be betting that the massive gains would be tapering off, at least in the short term.  I’m starting to think that the market is ready for a breather, so this would be a good time in my mind.

Automatic Allocations

One thing that I like about the 401(k) is that my money is divided up between funds that I choose which give me a good allocation.  I’d have to discover how to make these allocations on a regular basis.

Transaction Fees

There are currently no up front transaction fees with the 401(k), but depending on what my investment preferences are, I could pay $10 per transaction, as my Roth is currently through Ameritrade.  They do have no-fee funds, but I’d have to do some research to see if they are comparable.  If I were to purchase anything with a transaction fee, I’d have to determine the threshold on when to make transactions.  I wouldn’t want to make a $300 investment every pay period, for example, and pay a $10 fee each time.  That would be a 3.3% investment fee right off the top.  Instead, I’d have to accumulate the cash to a point where it made sense.

Maintenance Fees

I do a regular check to make sure that I’m not involved with funds that charge over a 1% annual maintenance fee as I believe anything above that is too high. I’d have to carefully look at whether the fees and results are comparable with the options available.

More Options

Should I choose, I could invest in individual stocks with my IRA contributions.  Some argue that you should never do that with retirement investments.  I’d have to do research and give some serious weight of the pros and cons.  Right now, it’s an ‘out of sight, out of mind’ thought process.

Temptation

Right now, my retirement allocation never hits my paycheck.  With the option of having it deposited and more ‘available’, would the temptation exist to defer some of the retirement contributions?  Regularly or even occasionally would be detrimental to the long term goal of a fully funded retirement.  Knowing myself and my financial personality, I believe the risk to be extremely low, but it’s still a factor worth considering.

There It Is

So, there’s the long and short of what I’ve taken into consideration.  I’m curious what you think, readers, and if any of you are in this boat, what you’ve done and how you go there.  Are there any factors I haven’t thought of or mentioned?

Thanks!

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With 401(k) Rollovers, It’s Not The Amount That Matters

When I started my first job out of college, it didn’t pay a lot of money.  I kept expenses low by splitting an apartment, driving my five year old car, and generally living the cheap, bachelor lifestyle.  As such, I was still able to contribute a few bucks to my 401(k) plan.

When I say ‘a few bucks’, I literally mean a few bucks.

Not only was retirement the last thing on my mind, but I wasn’t making enough to really be able to contribute a great deal.  The little bit I did contribute grew to a couple of hundred dollars.

I stayed at that first job for almost two years, at which point I realized it was time to start making more money.  So, I took a job that offered an almost 50% increase.

After a few months, I got a check in the mail from my old employer.  I guess I had received a letter or two telling me that I could roll my 401(k) over into my new employers plan or an IRA, but I didn’t do anything about it, so they sent me a check.

I had already started contributing to my new employer’s 401(k) plan, and it was actually a decent amount given the raise.  But, at the end of the year, the person that does our families taxes called and asked what had happened to the balance of the original 401(k).  I told him I had just taken the money, but that it wasn’t a big deal because it was only a couple of hundred dollars.

He wrote me back advising that I never do that again.  The lesson became clear when I read that it wasn’t so much the amount, it was the practice.

By taking the cash, I potentially established a precedent in my mind of saying two things:

  1. That a small amount of money is OK to take off the table when it comes to retirement planning
  2. Saving for retirement can wait until later.

The problem, as it became clearer to me in the subsequent years was as follows:

  1. The definition of ‘a small amount of money’ will change over time.  When I left that first job for the higher paying job, I got a 50% bump in salary and I thought I was flying high.  Yet, that amount is still less than half of what I make today.  At any point, the salary and what we define as ‘a lot of money’ will change. Thus, in the end, the balance in our retirement fund doesn’t really matter.
  2. The earlier the better when it comes to saving for retirement.  I don’t feel that much different as a person than I did when I made that choice, yet fifteen years had passed.  If I had continued to kick the can down the line, I would always be promising myself to save later, but who knows when that would have started?

I learned my lesson and I’ve never failed to roll over my 401(k) since, even though it’s transferred nearly half a dozen times.

As a young 23 year old, I couldn’t understand what was ‘the big deal’ about a couple of hundred dollar retirement account.

As a 37 year old, I can now say:

I get it.

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