By Greg Wiles
Q. I'm a 41-year-old who contributes 30 percent of my income to my 401(k) account, which my company doesn't match. I have gross income of about $60,000 annually and would like to retire in another 21 to 24 years. I am married but have no kids. I also have a rental property that will be paid off in 12 years. Should I continue to contribute this amount to my 401(k) or should I decrease this and contribute the maximum amount to my Roth IRA account?
A. The answer mostly revolves around the tax aspects of the two choices.
First a quick refresher: The 401(k), named after a section of the federal tax code, allows you to contribute to a retirement account in pre-tax dollars. This investment plan, offered through your employer, grows tax free until you begin withdrawing it.
The Roth IRA allows people earning under certain amounts to set up a retirement account with money they've already paid taxes on. Withdrawals are tax free after you reach 59 1/2 years old.
Financial planner Les Andrews, of Honolulu-based Andrews Advisory Associates, said planners will give different answers to the above question, but in general, he believes you would be better off sticking with a 401(k).
"You know you're going to get the tax benefit now, plus this is the time when you and your wife have high wages," Andrews said. "With a Roth IRA, what the government says is, 'Forgo the certainty of the tax benefit at your highest tax bracket today, but we'll let you take the money out later tax-free.' "
Andrews said you'll probably have a lower tax rate when you retire, so it makes sense to take the benefit today.
Martin Arinaga of the Chinen & Arinaga Financial Group has similar advice if you are in a high-tax bracket.
"If the tax bracket is 25 percent or up, then I'd still have him consider the tax-deductibility of the 401(k)," said Arinaga.
Assuming you own a home and take a deduction for mortgage interest, and that you're also getting deductions for your investment property, you may have a lower tax rate.
In that case, Arinaga said, you might consider shifting some of your retirement investing to a Roth IRAs. He said one advantage of the investment is that unlike employer-sponsored 401(k) plans that feature a limited number of investments options (typically mutual funds), you have a broader choice with Roth IRA.
Other issues to consider with the Roth IRA include an income ceiling that limits the investment option to married couples making less than $160,000 annually. The limit is $110,000 for single wage earners.
There also are limits on how much you can contribute to the Roth IRA. Since you are younger than 50, you can put in up to $4,000 annually.
Keep in mind that this equals more than $5,000 of your wages before taxes.
"I wouldn't be so hasty as to recommend a Roth, although I wouldn't rule it out," Arinaga said. "Many clients have both."
Arinaga said you also might keep in mind the flexibility the Roth IRA provides in making investments until the tax filing deadline and your tax burden in coming years after you pay off your investment property.
If you decide to go with a Roth IRA, keep in mind that starting this year, employers can begin offering a Roth 401(k). The amount you can contribute to the Roth 401(k) is $15,000 for people under 50.
Finally, a commendation is in order. Arinaga said it's unusual someone maintains such an ambitious savings rate.
"If he's saving 30 percent of pay, that's great," Arinaga said. "Most people, if they're even saving at all, save at most 10 percent. That's the minimum I like people to save at."
Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or firstname.lastname@example.org