Meeting Employer’s 401K Match: Now What?
Posted on May 25, 2007
After meeting your employeer’s 401K match, what is the next best place for more retirement savings? As I see the hierarchy of retirement savings tends to go in this order:
- Employeer’s 401K with Match. This is free money. You need to be saving as much as possible here for retirement. This should also be the last place you look to pull money from in an emergency prior to retirement.
- Roth IRA. The Roth IRA offers tax free growth. You save with after tax money, and all deposits and earnings are tax free when you withdrawal them in retirement. Check out a few posts on max income levels for Roth and tax deductible IRAs here and here.
- Tax Deductible IRA. For most 20-somethings in my opinion the Roth is the better option, but if for some reason you need to lower your taxable income right now, this will do the trick. As far as contribution limits go, you can only contribute $4000 between both a tax deductible IRA and a Roth IRA in 2006-2007. In 2008, the contribution limit goes to $5000. So what that means is in 2007 you contribute $3000 to a tax deductible IRA, and $1000 in a Roth IRA, but cannot exceed the $4000. The limits are slightly higher for people above age 50: $5,000 in 2006-2007 and raised to $6000 in 2008.
- Nondeductible IRA. If due to income levels you are not eligible for a Roth or tax deductible IRA, then a nondeductible will offer some limited tax advantages.
- Regular Taxed investment Account. If you have made it this far down the list with savings you are probably doing pretty well as far as retirement goes. Keep up the good work…
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3 Responses to “Meeting Employer’s 401K Match: Now What?”
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I agree that most people overlook the point that you should be contributing to the 401K only enough to receive the full employer match.
After that any more you want to put towards retirement should most likely go into a Roth IRA not into a 401K. The 401K is easier, but usually offers less investment options, has less flexibility, and doesn’t offer the ability to get your contribution back tax and penalty free at anytime.
The Happy Rock
I agree with your list
Ahmen, TheHappyRock.
If anyone is looking for an easy to read book about retirement, try “Stay Mad for Life” by Jim Cramer. He explains everything in laymans terms and can help you form a retirement strategy.