Should I Start a Roth IRA from $0 or Keep Contributing to My 401k at Age 42?

A Reddit user is trying to decide what to do with his retirement funds.

He has never contributed to a Roth IRA, but has been investing 14% of his income into his workplace 401(k) plan. He’s 42 with $250,000 in his 401(k) now and is debating whether he should reduce his 401(k) contributions to 4% of his income to keep earning his full employer match and then redirect the other 10% of the money that he’s investing into a Roth IRA.

He can’t afford to contribute more to his retirement than the 14% he’s currently investing, and he’s not sure if he sees the point of starting to invest in a Roth from $0 now, but doesn’t want to miss out on the benefits it could provide. 

So, what should the OP do? Stay the course with a 401(k) or diversify into a Roth?

Is it too late to start contributing to a Roth IRA at 42?

The original poster (OP) is hesitant to start investing in a Roth IRA now because he has always put his money into a 401(k). The OP is worried that the money won’t compound as quickly in the Roth because of the smaller balance. The OP also isn’t sure that putting money into a Roth is going to benefit him because he’s 42 already, and he has hit his career peak. 

Other Redditors, however, were quick to point out that having diversification into a Roth IRA could be well worth it, and even with a late start, the OP still has plenty of time to invest in the plan. Commenters pointed out that Roth IRAs have substantial benefits, as they will provide different tax breaks and perks than his 401(k) makes available. 

Getting a late start at taking advantage of these account perks can be better than never getting started at all, and since the OP still plans to invest enough to earn a full 401(k) match, there’s a lot to gain and very little to lose by redirecting some retirement funds to the new plan type. 

Furthermore, the OP’s concerns that he won’t earn as much compound interest as he would if he added the money to his 401(k) are unfounded.  The money is going to earn the same rate no matter what account it is in. While the OP’s balance won’t initially grow as fast in the Roth just because he has a smaller sum of money compounding, it will still compound at the same rate. 

Benefits of investing in a Roth

By investing in a Roth, the OP will have access to an account he can withdraw from tax-free as a retiree, and that won’t count towards determining if Social Security benefits are taxable. The Roth IRA also doesn’t have required minimum distribution (RMD) rules, so the OP will have more flexibility in when and how he withdraws money from that account.

Roth IRAs can also be opened with any brokerage firm, so they will provide a wider array of investment choices for the OP compared to a 401(k). Being able to access more types of investments, and some with potentially lower fees, means that the OP may be able to earn higher returns. This will only help his money grow.

Of course, the OP could also get access to a wider pool of investments by diversifying into a traditional IRA as well. If the OP thinks his tax rate is going to be higher now than in retirement, this could make the most sense, as deferring tax breaks until retirement is best for people who think their rate will go up over time. 

Ultimately, the OP may want to talk with a financial advisor about how best to allocate his retirement money, especially given that he has a limited amount to invest and doesn’t anticipate big salary increases in the coming years, so he has to make the most of his dollars. The advisor can help him determine if diversifying into a Roth makes sense, or if he should consider diversifying into a traditional IRA to get some of the benefits an IRA offers, but a 401(k) doesn’t, while maintaining his up-front tax breaks. 

The post Should I Start a Roth IRA from $0 or Keep Contributing to My 401k at Age 42? appeared first on 24/7 Wall St..