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:
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.
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.
Because 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.
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.
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.
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.
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.
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?