You're frustrated with Wells Fargo and looking for a change. For those that are ready to leave but not sure how to get started, we outline the steps.Read More
Blogs Written by PWR Advisors
We really like target-date funds. They are a simple and convenient solution for those that want an all-in-one investment strategy and don't want to worry about rebalancing. However, there are two situations where they aren't the best choice.Read More
I am a financial planner. I am educated on the laws of supply and demand, on interest rates, saving and the value of a dollar. I still bought my house at the peak of the housing market in 2018 and...I don't care.Read More
Robo-advisors fill a need. They are serving people with a small amount of money who haven't traditionally been served by advisors. That being said, PWR is not a robo-advisor and we have no plans to become one.Read More
My spouse and I recently decided to get a divorce. What should we expect with regards to the divorce process and its financial implications? I am particularly concerned about how my retirement plan will be affected.
Separated SamRead More
I have the ability to buy AD&D Life Insurance at work. The coverage would cost me less and I would get a higher death benefit than the Term policy I currently have. Should I buy it? I don't understand the difference?
- Insurance IreneRead More
Should I save to my pre-tax 401k at work or my Roth IRA? I cannot fully fund both.
Dear Super Saver,
To determine which account you should save to, calculate your tax rate today versus your projected rate in retirement. In general, Roth contributions are made with after-tax dollars and distributed tax-free. The 401k is the opposite - contributions are made with pre-tax dollars and distributions are taxed at ordinary income rates.
If you are in a higher tax bracket now than you will be in retirement, save to the pre-tax 401k. If you will be in a higher tax bracket in retirement, save to the Roth IRA.
There are other considerations:
Tax laws can change - We don't know for sure what tax rates will be in the future, therefore, some people prefer to save to both types of accounts to hedge this uncertainty and manage their tax bill in retirement.
Employer matching - If your employer offers a match on contributions, save at least enough to the 401k to receive that "free money".
Investment options - If your 401k options are limited and expensive, you may choose to invest in the Roth IRA for the ability to create a custom strategy.
Income phaseouts - You may make too much money to contribute to a Roth IRA. You can typically get around this with a backdoor Roth IRA, but saving to a 401k may still be the best option for high earners.
Flexibility - Roth IRA's and 401k's have different hardship provisions for accessing money earlier than generally allowed (age 59 1/2 with exceptions). Examples relate to education expenses, medical bills and a first time home purchase. Additionally, some 401k's allow you to take out a loan. While this isn't necessarily a good idea, it is an option that is not available to you with the Roth IRA.
Even though one savings vehicle may end up being a better choice for you mathematically, realistically, either is fine as long as you are saving enough. Have a fee-only, fiduciary Advisor develop a custom retirement plan to make sure you are on track.