In this brand new segment, the Brew’s personal finance writer Ryan Lasker is nose-diving into our inbox to address your personal finance questions. Submit your money woes here.
I have recently been hired for my first full-time position. The company is offering a 401(k) plan, but I also have a separate Roth IRA. Which one should I prioritize maxing out first?—Calla from Hawaii
Congrats on the new gig. I’m going to use you as a shining example that it’s never too early to save for retirement.
To answer your question, those sweet, sweet tax benefits of 401(k) and IRA retirement plans come in two flavors: traditional and Roth.
- Traditional plans let you contribute a portion of your paycheck before income taxes, but you’ll pay them on withdrawals in retirement.
- Roth plan contributions are taxed now, not later.
Your first priority should be to take advantage of your employer’s traditional 401(k) match. If your budget allows you to contribute more than that, or your employer doesn’t offer a match, answer this: Do you expect your tax bracket in retirement to be higher or lower than it is now?
If so, prioritize the Roth. But if you think you’ll retire with a similar lifestyle to your current one, focus on the 401(k).
If you’re unsure of your retirement plans (fair) use this rule of thumb: Prioritize Roth if you’re early in your career, and traditional options if you’re mid- to late-career. In the end, as long as you’re contributing to a retirement plan, you’re doing the right thing.