401(k) Inefficiency
I need to get this out in my first real post. My biggest retirement pet peeve in the world is when people who are Roth IRA eligible, max out their 401(k) instead of contributing something to their Roth. It boggles my mind that people do this and it is a travesty that advisors recommend it (and they definitely do). Let’s take a step by step approach to this fallacy and how to efficiently manage your retirement portfolio. For the purposes of this discussion, we will assume that your adjusted gross income (AGI) is within the Roth eligibility requirements.
1. If your employer has a match, take the match entirely. No investment offered anywhere can beat free money. If the match is 3%, contribute 3%. It really is that simple.
2. Do NOT contribute more than the match. If you truly need the deduction, then take it. I won’t argue with you, but I still think you’re better off without the deduction.
3. Open an Roth IRA. I personally like American Funds, but if you’re comfortable with another Roth option, that’s fine too.
4. If you had enough money to max out your 401(k), presumably you have enough to max out your Roth. The maximum contribution in 2008 is $5,000. If you are married, you should be maximizing your spouse’s Roth as well.
You might be thinking that at this point, if you still have disposable income, that you should contribute the remaining amount towards your 401(k). No! No! No! Seriously, you will need to break this “401(k)s are the greatest retirement vehicle in the world” habit. Contribute up to the max. No more and no less.
To be continued…(post was a little too long)