Should I Max Out My 401k?
Chris heard that he shouldn't max out the 401K he has with his employer, so Dave advises him to put the rest in a Roth IRA.
QUESTION: Chris and his wife are debt free except the house. He’s been told that he shouldn’t max out the 401k he has with his employer, but that he should match the percentage his employer puts in and then invest the rest in more accessible savings. Is that right?
ANSWER: You should look elsewhere, but not in something more accessible. You should go to a Roth IRA because it will grow tax free. Tax free is much better than tax deferred. The best way to invest for retirement is the match – that’s what you want to do first; then tax-free investments; and, finally, tax-deferred.
At Baby Step 4, you need to be investing 15% of your income for retirement. First, match your 401k. Then, fully fund two Roth IRAs (one per person), which is $4,000 each for the year. If the total of those two savings is still less than 15% of your income, then go back to the 401k and put the remaining percentage in it.