‘Should I put my 5% into traditional so I only have one employer account and it grows together rather than in two different accounts?’: I’m torn between 401K options. How do I decide?

Hi Money Minder,

Hey there, just wanted to share my financial journey with you. I recently paid off my student loans and credit card debt (27 y/o, M). The only thing left is a 12k auto loan that my wife and I split evenly at 1.9% – not too shabby with 16 months left.

Now, I’m all about diving into my Retirement accounts. I’m already doing the match (5% me, 4% employer, 9% total) in my company’s 401K. And you know what? I’m a big fan of ROTH investments. I’ve got a ROTH IRA with around $8k, and I can finally start adding more.

I found out my company offers a ROTH 401K option, so I switched my contributions from traditional to ROTH. But here’s the twist – my employer only matches pre-tax contributions into a traditional 401k, while my 5% goes into the ROTH. I like keeping things simple and having tax-free withdrawals later. So, should I put all that 5% into traditional and have just one account growing together? Or keep it in the ROTH 401K and continue adding some personal money into my ROTH IRA (looking at $200-$400 monthly for now)?

I’m at a crossroads here, and I could really use some advice. Thanks in advance, Money Minder for any insights you can offer!

Take care,

Financially Curious Guy

Response from THE MONEY MINDER:

Hello There,

Congratulations on getting out of student loan and credit card debt, that’s a huge accomplishment! It’s great to hear that you’re now focusing on maximizing your retirement savings. It sounds like you’re on the right track with contributing to your 401k for the employer match and having a Roth IRA for further savings.

Regarding your question about whether to continue contributing to your Roth 401k or switch back to traditional to consolidate your accounts, it’s essential to consider your long-term financial goals. While having all your retirement savings in one account may seem simpler, keep in mind the benefits of diversification and tax planning.

Since your employer only matches contributions for the traditional 401k, you could consider contributing the 5% to take advantage of the full match. This way, you’re getting the most out of your employer’s contribution while also building a solid base of pre-tax retirement savings. You can then continue contributing to your Roth IRA separately to have tax-free withdrawals in retirement.

It’s essential to have a balanced approach that considers both immediate benefits (employer match, tax deductions) and long-term advantages (tax-free withdrawals, diversification). This way, you’re building a robust retirement portfolio that aligns with your financial goals. As you mentioned, saving for other goals like a down payment can also be a priority, so finding the right balance between different savings accounts is key.

Remember to regularly review your retirement accounts and adjust your contributions as needed to stay on track with your goals. Keep up the great work on your financial journey, and best of luck with your retirement savings and future plans!

Farewell from THE MONEY MINDER.