Join our community, read the PF Wiki, and get on top of your finances! Press J to jump to the feed. First, the tax benefit is meaningful. By using our Services or clicking I agree, you agree to our use of cookies. Yet, most people don’t know how to max out the 401k. I'm assuming this also then means I can't convert some of the funds in the traditional IRA to a new Roth IRA acct and contribute $5500 annually (i exceed income limits so can't open up a Roth directly.). My employer caps the after-tax to a select % of base salary, but I'm saving ~$50k annually alone across 401k/IRAs. I recently wrote about paying yourself first, and one astute commenter had a great question about the value of maxing your Roth IRA first or your company’s 401(k) plan first.. You can do both trad IRA and backdoor Roth IRA in the same year, but the IRA limit applies to all of your IRAs during the year. I have read the advice "always max out your 401k", or "First, max out your 401k" far too many times to continue to ignore. Many people pull the $ out when they incur the medical expenses, but then all the subsequent growth will be taxed. If they instead leave the money in the HSA and keep track of the expenses, the $ keeps compounding tax-free. If you have enough funds in both tIRA/401k and roth, you can basically decide how much tax you want to pay that year. Contribute as much as your'e comfortable to 401k beyond the employee match. Are there certain scenarios where the answer differs? If you find yourself unemployed, medical expenses like cobra add up quickly (especially if it's for medical reasons you can't work). Don't you have to use your HSA for medical expenses? The site may not work properly if you don't, If you do not update your browser, we suggest you visit, Press J to jump to the feed. On the expenses, I have been surprised lately that 2 401ks I track both have ultra-low fee options now. Ignoring everything else the 401k usually has better bankruptcy and lawsuit protection so if you're sued it may be protected while IRAs vary state to state. I think at least a few in the 0.03-0.07% range. I'll just add another benefit of having both roth and 401k/tIRA. Assuming your 401k plan is good, it’s best to go with the 401k first. So this money is not locked away until retirement. This allows you to save more aggressively and still access that money if circumstances change. I wanted to get your thoughts because it seems like most people here do max out their 401ks while also contributing to another Traditional or Roth IRA. Your withdrawl from roth is tax free. If you can max out her 401K/403B as well, you will be in really good shape. See here. Press question mark to learn the rest of the keyboard shortcuts. If your 401K matches, you should save for retirement in that plan up to the percentage that your employer matches. Find communities you're interested in, and become part of an online community! But you can still make nondeductible contributions. The limits are separate. You won't be able to cleanly do the backdoor Roth IRA unless you convert all your traditional IRA assets to Roth (and pay income taxes on the conversion amount) or roll the pre-tax traditional IRA assets into a 401k. I'm a bit unclear as to the rationale for that decision ie Roth vs 401k. Another factor I would consider is where you think your career may head. Press question mark to learn the rest of the keyboard shortcuts, https://www.bogleheads.org/wiki/Backdoor_Roth_IRA. IRA. The reason you max an IRA before 401k is because your 401k funds probably have higher fees. Who can participate. Getting the match is key because it's basically free money, then after that you try to optimize your expense ratios. 2 months ago More than 1 child. Most financial planners encourage investors to max out their 401 (k) savings. Please contact the moderators of this subreddit if you have any questions or concerns. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. For those aged 50 or older by 12/31/2019, the limit rises to $25,000. Total contribution between the two in a year is $18K + $5500 for $23,500. Clients regularly ask whether they should max out a 401(k) — and sometimes they’re surprised by the answer, says Jeff Weber, a certified financial planner and wealth advisor at Titus Wealth Management. 1  If you can afford to max out your contribution, you might want to do so. You do not need to withdraw right when you have the medical expense. What is a 401(k)? How to Max Out 401k. In conclusion, it’s better to max out your 401k first then work on the Roth IRA. Another really great feature of Roth IRA that is not often talked about is that you can withdraw the principle, but not the gains, without tax or penalty at any time. It's your freedom to pull how much ever you wany from either retirement accounts. I know my own 401k fees are around 0.3-0.4% compared to my IRA funds which are all under 0.1%. Edit: or IRA as this may have lower expense ratio and more options available to you for investments. Doing so makes it a hybrid emergency fund/retirement account. If your employer offers a 401(k) plan, there may still be room in your retirement savings for a Roth IRA. You can max 401k and max a traditional OR roth IRA. A qualification here... your contributions can be withdrawn tax free. Thomas asked, “I agree with the at least maximize your employer match but have been confused as to why people don’t max out 401k first before adding to ROTH?” You can't access the money until age 59 1/2. Continue this thread level 1 2 months ago. I asked a friend who is in financial planning and he says that you're not able to keep making contributions to an existing traditional IRA. 3 years ago The reason you max an IRA before 401k is because your 401k funds probably have higher fees. I'm currently putting money into my 401k up to the amount my employer matches. The 401K contribution limits have been steadily increasing. If you're not going to max out, I'd put it in the 401k so that you have one less account to manage (assuming you have decent investment options in your 401k). Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. 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