Is a Roth IRA for You?
Maybe, maybe not
Any season can be savings season, and last month I offered principles to follow to distinguish whether a Roth IRA or regular IRA is a better choice. Today's book installment, serial count #22, is the second of three installments on retirement planning.
Last week, we set up the “Retirement” chapter, in which a plan to save was determined by optimizing the lifetime living standard for Steinbeck Blue without any explicit savings purpose and letting the optimization procedure inform when to save and withdraw over his prospective long life. If Steinbeck had access to a 401(k), would he be better off? The answer for Steinbeck is yes, given his investments and taxation.
Should you always save through a 401(k) plan if your employer offers one? It may not be the best idea for every household. The book provides a general applicable ideas for making the best decision.
Today: How to consider the value of a Roth IRA in retirement planning and compare the value properly against a 401(k) plan. In a second case study, we consider “maxing out” contributions to a Roth, currently $7k this year, $8k for those over 50, to measure the effects on the lifetime living standard. The answer to the second case is complicated because money is taken off the table today to fund an unknown future. Can you imagine an individual with an income of $50,000 maxing out their Roth retirement contribution and giving up food, shelter, and clothing needs to do it? There are trade-offs.
A third case study explores “Employer Matching Contributions,” their retirement value, and the lifetime living standard. Below is a graphic on employer matches from Vanguard’s latest “How America Saves” study of their customer set. If you work for a larger employer that offers a defined contribution (DC) plan, the employer likely throws money into your retirement account…if Vanguard is involved.
Regardless of the investment company that works with your employer, if you have a match, you may have to stay with the employer for a few years for their contributions to vest. Otherwise, many employers enable their matches to vest immediately; you take them with you when you leave.
Excerpt:
The complete installment is in today’s PDF: