Max Out the 401k – Not!

We have all heard it before, max out your 401k! What used to be good advice is now out of date. Assuming max out means contribute the maximum possible then perhaps you need to take another look at what that means to you.

I say you need to look at the numbers before you “max out” that 401k. Here’s why.

What part of the contribution does you employer match and up to what limit. Only if your employer matches up to the maximum contribution should you consider contributing the maximum.

Contribute only the amount that your employer will match and put the remainder in a Roth IRA. Yes, I know that you will be losing the tax deferment on the money invested in a Roth, a one time event, but with the Roth you can leave the investment grow tax deferred for as long as you like. Unlike the 401k and the standard IRA there is no MRD (minimum required distribution).

Here are the Roth IRA advantages:

1. It has a tax structure unlike that of any other IRA: contributions are post-tax, but growth is tax-free; once you put your money in, you never pay taxes again.
2. It's more flexible: since you have already paid taxes up front, there are no minimum distribution requirements.
3. Since withdrawals are not reportable income, they won't affect your adjusted gross income during retirement.

Another advantage for a savvy investor is that your choice of investments is not limited to the few that a typical 401k might have. Your investment choices are essentially unlimited and that can mean big dollars in the future.

Some day after you are retired wouldn’t it be nice to take that trip around the world using tax free money that you grew from those excess payments to the 401k you redirected to a Roth and not have to worry that there is any impact to your tax status?