Roth IRA: A Matchless Choice

Roth IRA: A Matchless Choice

By Kaye A. Thomas
Posted December 18, 2008

Accounting for Active Traders

Schedule D made easy

Conventional wisdom, updated.

You can put a lot of brainpower into your choice for retirement savings, but conventional wisdom leads to the following conclusions for most people:

  • Save first in your company's 401k plan until you've pumped in the maximum amount that qualifies for matching dollars.
  • Then put as much as you can in a Roth IRA.
  • Save any additional dollars in the 401k, which is a pretty good deal even without the match.

The thinking is that most people are better off in a Roth than a traditional IRA. Yet it's hard to beat the additional benefit you get when the company matches your contributions to a 401k plan. Even if the match is only 25 cents on the dollar, that's like getting a three-year head start on the growth you hope to get by investing your money.

Well, things are rough all over, as my mother used to say, and today FedEx became the latest company to announce that it's suspending the match on its 401k plan. Workers there can still save in the plan, but they won't receive matching contributions until the shipping giant returns to financial health.

What to do? Skip that first bullet point above. If your company is among those suspending the 401k match, your first dollars should go into a Roth IRA, assuming you qualify. For 2009 the maximum contribution is $5,000 for younger savers and $6,000 if you've reached age 50. Look to the 401k after you've maxed out your Roth.

Reasons for this approach are detailed in my book, Go Roth!, and in our free online Guide to the Roth IRA. One advantage deserves special attention in a time when many people face economic uncertainty: a Roth IRA can provide a haven for money you might need in an emergency. Regular contributions can be withdrawn at any time, for any reason, free of tax or penalty.

Most 401k plans offer only limited access to the account prior to termination of employment. Even if you qualify for a hardship distribution you may face a 10% penalty, in addition to regular income tax, if you take the withdrawal before age 59½.

Tapping a retirement account before you're actually retired should be considered a last resort. Yet many people will face that necessity before we pull out of this economic crisis. The tax consequences will be less painful for those who saved in a Roth.

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