The Best All-Around Retirement Account

Here's the next item I wanted to cover from Kiplinger's "The Best List". Today, we're highlighting the best all-around retirement account:

The Best All-Around Retirement Account: Roth IRA

A Roth IRA lets you stockpile tax-free savings for retirement with plenty of escape hatches for other financial goals, such as paying for college or buying a first home. You can contribute up to $4,000 in 2006 ($5,000 if you're 50 or older) as long as your income doesn't exceed $110,000 if you're single or $160,000 if you're married. And you can withdraw your contributions (but not your earnings) tax- and penalty-free at any time.

Ok, I'm going to get a lot of flack for this, but I wouldn't rate the Roth as #1 for people who have access to a 401k, especially for those who have a 401k where the employer matches part of the employee's contribution. The 401k gives you a tax deduction this year (in that it lowers your taxable earnings), gives you an instant, strong return on your investment (when the employer matches), allows you to save much more than the Roth IRA, and isn't subject to the income limits that the Roth IRA is. Yes, the Roth allows for tax-free withdrawals, but I don't think that outweighs the 401k's benefits. As such, I'd rate the 401k the best all-around retirement account.

That said, my recommended strategy for people who have a 401k and can contribute to a Roth IRA is as follows:

1. Contribute to the 401k to get the full employer match.

2. Contribute to the Roth IRA as much as you have left over -- to the limit, if possible.

3. Contribute any remaining retirement savings funds to the 401k (without the employer match at this point.)

For more thoughts on retirement, see Best of Free Money Finance: Retirement Posts.

Comments

[B.Brown]

I see no reason for anyone to give you flack on the statement that “I wouldn't rate the Roth as #1 for people who have access to a 401k, especially for those who have a 401k where the employer matches part of the employee's contribution.” This is a no brainer. Free money from your employer that compounds thereafter! I can understand that maybe Kiplingers is considering the self employed or other factors. However, you investment strategy mentioned is right on target.

www.brianbrowncpa.com/blog/

[William Tanksley]

Agree -- 401k is better.

I have to add that the HSA (Health Savings Account) is also excellent -- I'd say better than an unmatched 401k. With it, you get an immediate deduction, tax-free spending on medical expenses, and it acts like a conventional IRA when you retire.

[Steve]

I'd say the Roth 401(k) is the best. I'm surprised they didn't pick that. Maybe because it's too new. All the benefits of a regular 401(k), but with higher effective contribution limits since you're contributing post-tax dollars.

That said, I think the best strategy is to contribute to both a regular 401(k) and the Roth 401(k), providing your employer offers it.

[Lord]

I mostly agree with you. The Roth is overrated. For the all but the top quintile or even decile even the Traditional IRA is superior as the compounding of the income tax deferral outweighs the tax they will pay. The Roth does have the edge for their intended audience though.