Comments on: Reader question: Should you invest in a 401(k), a Roth IRA, or pay off credit card debt?

By: MyMoneyDesign

MyMoneyDesign — Sun, 08 Jan 2012 13:33:21 +0000

I’m not sure how much money we’ve got to work with here, but I would recommend a combination of events: First, concentrate a high proportion of your money to paying down the credit cards. It is unlikely that your investments will ever be more than the interest you are paying on this debt. From there, decide how much you can invest in the 401k. The goal will be to invest enough to get the full employer match. After that, invest anything left over into your Roth IRA. If you ever reach a point where you max-out your Roth, go back to your 401k and start maxing that out as well. This will level out your tax-sheltered plans.

Although there are still student loans to deal with, they will likely be at lower rates than what you could earn “long-term” with your retirement investments. Keep paying them and even add to the principal if you’d like to see them go sooner. But don’t neglect your 401k and Roth first.

By: Charles

Charles — Sun, 17 Feb 2008 00:42:52 +0000

Connie,

To the extent that you have taxable income from a business, you should consider an individual 401K. You can contribute the same $15,500 or $20,500 (based on age) as a corporate 401k plus a profit-sharing contribution from your business – all pre-tax if you wish. The only catch is that you have to be a solo employee in your business (your spouse can be an employee also.) All the major brokerage firms have them. If you wish to invest in alternative investments such as real estate, gold or businesses, you need to open a self-directed 401k available at certain trust companies (this what I have.)

By: DR

DR — Thu, 07 Feb 2008 11:22:04 +0000

Hal, excellent advice. It can be difficult at first, but once you develop the habit of regular savings, it gets much easier.

By: Hal

Hal — Wed, 06 Feb 2008 21:16:59 +0000

Interesting article. Important thought comes to mind is Pay yourself first. Pay off any debt that is not tax deductible. If your not money management capable, get with a reputable financial advisor to help set up a successful program.

By: Connie

Connie — Fri, 25 Jan 2008 08:32:43 +0000

@ Jon, I think splitting the difference between both types of IRAs is a nice insurance policy.

I do not have a 401(k) option through my employer, so I instead split that money between a high interest savings account (keeping it more liquid) and a regular stock account.

It’s not ideal by any means, I would also be really interested in hearing any advice Dough has!

By: Jon

Jon — Thu, 24 Jan 2008 16:29:43 +0000

One concern I have is all the talk about a national sales tax. If that is used to replace (entirely or in part) the income tax, Roth IRA investors will be seriously harmed. I’m thinking that from now on I should split investments between Roth and Traditional IRAs.

Dough, I’d love to see an article about retirement savings for people who have no access to 401(k) plans. What options are there to save more than the IRA limit? Can you start a 401(k) for yourself?

By: Ron@TheWisdomJournal

Ron@TheWisdomJournal — Thu, 24 Jan 2008 15:53:19 +0000

The Federal Reserves estimates that the return consumers get by paying off credit cards is a whopping 14.4%.

I would suggest paying them off and then using the payment amounts to fund a Roth IRA. But that’s just me

By: Lily

Lily — Thu, 24 Jan 2008 14:33:12 +0000

I agree with Shane. One also must assume that the government will keep Roth tax-free in the future. Without getting into politics, that’s not guaranteed (after all, people used to think SS benefits would never be taxed).

By: Shane

Shane — Thu, 24 Jan 2008 00:25:20 +0000

Responding to CiaranFromChance – although Roth IRA’s may be valuable to some, I’d argue that they really aren’t for everybody. The largest incentive for a Roth IRA is locking in your tax bracket now, with the idea that your accumulated wealth is tax-free in the future. One must bear in mind, however, that it’s very likely once retired your tax bracket will be lower, and (more importantly) seniors have much more play in playing with their taxable income.

A second thought one must consider is the simple element of compounding – starting with more (i.e. – before tax contributions) will build that snowball quite a bit faster than after-tax contributions (which, naturally are lower) .. One must have a long time horizon and assume higher tax brackets in retirement for it to be a financially cost-effective decision.

By: Best Advice on Debt

Best Advice on Debt — Wed, 23 Jan 2008 19:07:47 +0000

I personally subscribe to the Dave Ramsey school of thought. Get rid of your debt first (except for your house), build an emergency fund, and then start investing.

It’s helped me & thousands others become truley wealthy. So it’s the one I recommend. However, that’s not saying there are other ways.