Should I contribute more to my 401(k) or IRA?
I am trying to figure out a reasonable strategy for my situation.
I make over the limit to write off traditional IRA contributions on my taxes starting in 2020. I currently contribute 8% to my 401k. As a result, I am trying to justify where to place my retirement now because the primary benefit of the IRA has been removed for my income bracket.
I see a few different options:
Raise traditional 401k contributions to 10-15% (somewhere in there) and do not put any money into the IRA anymore (essentially moving my IRA contribution % into the 401k).
Raise traditional 401k contributions slightly (1-2%) and continue contributing to the IRA.
(1) is straight forward. However (2) presents some different complications.
I am currently returning around 9% a year in my IRA. My 401k is lagging, producing around 7% per year. There's not a whole lot I can do inside of my 401k. I am forced to invest in mutual funds they provide. Their expense ratios are approximately equal to the expense ratios on the mutual funds in my IRA (~.25-.35%). My thoughts with (2) are to contribute a little more into my 401k in order to reduce my taxable income some, and contribute the rest into my IRA to (up to the contribution limit of 00) in order to take advantage of superior returns. Given my financial situation at the moment, I do not make enough to max out my 401k and the IRA without significant sacrifices in my lifestyle. Maxing out my IRA however, is not a problem.
Is there a better way to look at this? I've gotten advice that amounts to "just max out your 401k" but the lack of flexibility in the 401k bothers me, and I don't get a match to boot.
EDIT:
For (2) I would create a roth IRA for any further contributions, mirroring the position in my original IRA. Due to the amount of money in my IRA presently, a backdoor roth would incur significant costs.
(2)2 Comments
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It sounds like your question can be boiled down to: is it worth contributing to a potentially less tax-optimal Roth account (versus a pre-tax account) in order to access better investment options?
You are probably the only one that can answer that. But some points to consider:
How superior would pre-tax versus Roth contributions be for you? The main factor here is tax rate now versus tax rate in retirement. In general I think many overestimate their tax rate in retirement, and pre-tax is usually the way to go. But with that said, locking in a 10 or 12% federal tax rate right now isn't terrible. Tax diversification is a good thing too.
What investments can you access in your IRA that you can't in your 401(k)? It sounds like the funds in your 401(k) are fairly inexpensive, so that's not a major concern. Remember past performance does not guarantee future results, so 9% versus 7% return may not continue forever.
My thoughts with (2) are to contribute a little more into my 401k in order to reduce my taxable income some, and contribute the rest into my IRA to (up to the contribution limit of 00) in order to take advantage of superior returns.
This is making the best of the "bad" situation of earning 6K+/annum.
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