Is It Time To Switch To Roth IRA Contributions

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.


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?


16 thoughts on “Is It Time To Switch To Roth IRA Contributions”

  1. When my wife became a stay at home Mom, thereby cutting our income in half, I switched to Roth 401(k) contributions because the tax benefits of deferring income dropped considerably.

    That’s somewhat off-topic from your original point though, sorry. In your shoes, since you’re not forgoing any match, maybe you could split the difference and go 50/50?

  2. Since you can only contribute $5500 to a Roth, you would just need to reduce your 401k contribution enough to free up the money for the Roth. You are allowed to contribute to both a Roth IRA and a 401k. If you only have enough money for one though, the Roth IRA is the best choice, especially considering your 401k doesn’t have a match.

  3. For the record, I contribute to my Roth IRA and have for years. I am hedging my bet because I do not think I will be in a higher tax bracket when I retire. I guess I can only hop!

  4. I think it’s a good idea to have some of both. My wife and I have always maxed out our 401(k)s and Roth IRAs. I would not buy individual stocks in a Roth IRA, but ETFs can be a good move. You should look at Vanguard’s VTI (Total Stock market) and BND (Total Bond market) ETFs. VTI has the same low expense ratio of 0.05% as their Total Stock market admiral fund.

  5. Assuming you both qualify, $11,000 into the Roth before the unmatched 401(k). Then use the remainder into the 401(k). I’ll assume next year you’ll have $17,500 to allocate (because you said you’ll soon be maxing out), and you’ve already got a fair amount in the 401(k) from past years – if the Roth is hurting, money now can help the diversification. Then you can do $11,000 Roth, $6,500 401(k), and get back to trying to max out the 401(k).

    Oh, and the Roth is almost definitely going to have lower fees.

  6. I agree with No Waste…I don’t necessarily think you have to cease all contributions to your 401K. It is a balance and it is hard right now to determine whether the tax benefits of the 401k and Roth will be better. It depends on what your tax bracket will be when you retire and what the tax rates are at that time. As for Roth IRAs, I recommend Vanguard. No need to go through Ameritrade. And you can set it so they automatically deduct from your checking account each month.

  7. I’m with everyone else that suggested you do both. 🙂 Like Andy pointed out, there is a $5500 max limit anyway, so you can pull it off and then be able to balance withdrawals in retirement like you wrote. My husband and I max out a Roth IRA each and are thinking about opening a SEP IRA too. Good luck!

  8. That’s too bad your company does not to a match anymore. Without any 401k matching contributions from my employer, I think I’d hit the Roth IRA first before anything. I value the fact that I’ll be paying taxes now and not having to pay them later. Plus I can appreciate the diversity of the options and the likelihood that I could pick a lower cost, better performing fund than what my employer offers. If I exceed the $5500 limit, then I’d use my 401k as the backup for more tax deferred savings.

    On the whole stock thing in your Roth IRA, I wouldn’t sweat it. As long as you pick good options with large companies (preferably dividend payers), you could end up doing just fine.

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