Where to Put the 15%

What should you do when your employer stops matching your 401(k) contributions?

QUESTION: Linda in Ohio says her employer stopped matching her 401(k) contributions. She wants to know if she should she continue contributing to her 401(k) or put it in an IRA. Dave recommends where to put the money, but only doing that after she walks through the Baby Steps.

Dave's ANSWER: I would put 100% of my retirement savings into a Roth IRA in good growth stock mutual funds before I did anything in a non-matching 401(k).

Our goal is for you to be debt-free first and have an emergency fund of three to six months of expenses in Baby Step 3. Then Baby Step 4 is to save 15% of your income into retirement, and you won't be doing anything until you get there.

The first portion of that 15% should be in matching 401(k) plans. If you don't have a matching 401(k), you move on to number two, which is a Roth IRA. All of these needs to be invested in good growth stock mutual funds with long track records, and then the rest of the money goes into non-matching 401(k) plans. But you do those until you get up to 15%.

Right now, in 2012, you and your husband can put $5,000 each into your Roth IRA. With two of them, that's $10,000. But if you have a $100,000 income, that's only 10% of your income. You'd need to do a non-matching 401(k) and get the other $5,000 out there because you need $15,000 going out there in Baby Step 4.