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Apr 26 2010 12:00AM


My husband and I are both 33 years old and make about $140,000 combined. We are contributing $15,000 each per year to our 401(k) accounts. Should we cut back our 401(k) contributions to $10,000 and begin funding a Roth Individual Retirement Account (Roth IRA) with the $5,000 maximum per year?


FPA member Ruth Delaney, CFP®, of Greenleaf Financial Strategies, said the first question that she always asks is: "Do you think you will be in a higher tax bracket when you retire?" 

"Considering your ages, I would assume the answer is yes and would recommend that you contribute to a Roth IRA," she said. "First, find out if your employer offers a 401(k) Roth. If so, use that. If not, then your solution — reducing your 401(k) contributions and setting up a separate Roth IRA — is the best route to take."

If you can afford it, a better solution would be to "put the maximum in your 401(k) account and the maximum into the Roth IRA if the income stated in your email is below the limit for the Roth phase out," said Delaney.

"Of note, if you think you will be in the same or lower tax bracket in retirement then the Roth is not worth investing in," said Delaney. "You would be better off with the traditional 401(k) plan."

If you save inside a Roth 401(k), be sure to roll the Roth 401(k) to a Roth IRA at retirement. "The reason for this is that you must take a required minimum distribution from the Roth 401(k) at 70½," she said. "This is not true for the Roth IRA, so you have more flexibility. You'll also expand your horizon of investment options."

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