Question: I’ve heard Dave Ramsey and now you (and others) say to match the employer and then fund a Roth IRA and then back to the Roth 401K. My question is why? Why not just stay in the Roth 401K due to lower fees? Is it because of the lack of 10,000 funds? Thanks..
The object of the game is taxes. If you are in a high tax bracket it doesn’t make much sense to contribute to the Roth until you have contributed enough in standard 401K/457/403B plans to lower your tax bill. Fees are a separate issue.
Mostly because of the availability of funds to choose from are often limited by your 401K plan. However, when you go to a Roth IRA you’re picking the investment firm you deal with, and it’s not limited by what someone in your HR dept. agreed with them should be available. In other words, you’re almost certainly able to diversify more in anything outside your 401K, whether you put it in a Roth IRA, IRA, plain ol’ taxable accounts, or some combination. For example, I like to use Paul Merriman’s Ultimate Portfolio, or his Value Portfolio. I also like to put a little into an energy fund, a tech fund, a health sciences fund, etc. Good luck finding funds for all those asset classes in your 401K.
2) With Roth IRA’s you can take money out after 5 years without penalty. Really it’s just 4 and a piece years. The law says it counts the number of January 1st’s since you open a Roth IRA. So if you start one before 2018 is over, beginning Jan. 1, 2023 you can take out of your Roth IRA whatever you put into it penalty free. The key is to keep up with how much you’ve put into it (IRS word is “contributions”) and how much you’ve taken out (”distributions”). For example, I have 4 kids and didn’t know how many of them would go to college or stay in college. So I didn’t want to use a College 529 to save up for them — what if I had only 1 kid go to college and was left to being penalized for taking the extra money out of the 529 account for non-college use (i.e. retirement). Solution: I started Roth IRA’s in mine and my wife’s name many years before college (because of the 5 year rule). Our budget allowed us to easily cash flow one kid in college, and was tight with two kids in college. But when we had three kids in college simultaneously I had to take some money out of our Roth IRA’s. There were no questions asked. No receipts needed to prove it was used for college. Just an extra form to fill out during tax time that year. Like I said, keep up with your contributions. If you take out more than you put in you get into the earnings portion — and that’s not allowed without penalty unless you’re at least 59.5 years old.
Bonus points: Start a Roth IRA in both your name and your spouse’s name to start the 5 year clock for both of you. The minimum is $1K to get started (or agree to $100 per month for 10 months). Then if you got spare money in your budget contribute to the Roth IRA of the oldest of you and your spouse — the one who’ll get to 59.5 years old first. After 5 years, when you have extra money you can throw it in your Roth IRA’s without worrying about the possibility of needing it later (i.e. if the car needs to be replaced).
Bonus Point #2: It’d be unwise to invest in LSU this Saturday. :)