Where to Save Your Retirement Investing Contributions

Welcome to the 3rd week of my ‘Understanding Retirement Planning & Investing’ series! If you’ve missed the first two posts be sure to check them out!


Picture by 401K

With the understanding that a 401(k), 403(b), 457, Roth IRA, and Traditional IRA are simply investment vehicles – tax-sheltered accounts (an umbrella) that allow your money to grow tax-deferred – the next step in the retirement planning process is to learn which account(s) will be the best places to save your retirement contributions.

This may seem basic to some people but I get asked all of the time, “where is the best place to invest money for retirement?”

Should you put money in the 401(k) before you contribute to the Roth IRA?

Why not contribute to the Roth IRA before the 401(k)? You know about all of the great benefits that I talked about in my first post of this series, so it might seem logical to start with the Roth.

Where to Save Your Retirement Contributions

As a financial advisor, I personally follow this route and recommend it to all of my clients.

  • 1. Look for FREE MONEY

    Free Money?? Who would say no to free money?

    Well, people do it every day! It’s right under their nose and they just walk right past it without understanding they’re passing up FREE BENJAMINS! .

    All you have to do is go win the lottery or get an inheritance. BOOM! Free Money! You can thank me later. 🙂

    In all seriousness, what I’m talking about here is taking advantage of the company match provided by your employer!

    While some employers have suspended their matching (post 2008) many continue to do it in some fashion. If you have a 401(k), 403(b), or 457 and your employer is offering a match, that is the first place you should invest your retirement money!

    Don’t take my word for it. Let’s think about this logically…

    If your employer is matching 100% or 50% of your contributions then that is FREE MONEY! That is a 100% or 50% return on investment, respectively, BEFORE YOUR MONEY EVER REACHES THE MARKET!

    You simply can’t beat a 50%, 75% or 100% return on your investment.

  • 2. Tax-Free Money

    After you’ve contributed to your employer sponsored plan up to the company match, if you still have additional money to contribute to retirement savings, then the next thing I look for is Tax-Free accounts.

    While there are a few different Tax-Free retirement vehicles and investments, the place I’d suggest to consider first is the Roth IRA.

    To jog your memory there are a few special benefits of the Roth IRA:

    • The account is funded with after-tax dollars but you NEVER pay taxes again (even when you withdrawal money after age 59 1/2).
    • The interest you earn NEVER gets taxed (assuming you withdrawal it after 59 1/2)

    In my mind there is ZERO doubt that taxes will go up in this country – ESPECIALLY FOR HIGH INCOME EARNERS.

    What…you think you’re not a high income earner? If you start saving for retirement early, invest prudently, and build a LARGE nest egg, do you think it’s likely you’ll be in a higher income tax bracket in retirement than you are today? I certainly do!

    On top of that, the reality is that there are only a few ways our country will ever get back on sound financial setting and part of the solution will have to involve increasing taxes, for everyone! Period.

    I’d rather know my tax liability today and take the hit now, instead of relying on our government to manage our country well over the next 30-40 years and HOPE that taxes will be the same as they are today (or lower) by the time I retire.

  • 3. Tax-Deferred Money

    After you’ve taken full advantage of your employer’s contributions AND once you’ve maxed out your Roth IRA contributions, then I’d invest any further retirement savings into a tax-deferred account (if you’re confused by those definitions then please see the 2nd post of the series that I mentioned at the start of this post).

    This means to go back to the 401(k), 403(b), or 457 and contribute as much as you can up to the maximum amount allowable (50% of your income or $17,000/year as of 2012 – whichever is lower).

This may be clear by the suggestions above but my belief is:

  • Free $$$ > Tax-Free Money
  • Tax-Free Money > Tax-Deferred

Retirement Investing Order of Priority (made simple)

For those of you that want an easy breakdown and prefer for somebody to tell you what to do without understanding the reasoning, then here.

1. 401(k) – UP TO THE MATCH

2. Roth IRA – up to the limit ($5,000/year or $6k/year if over 50)

3. 401(k) – up to the limit

If you don’t have a 401(k) then contribute to whatever employer sponsored plan that is available to you (403(b), 457, etc.).

I realize many people believe throwing money in their 401(k) is easier than contributing to a Roth because they never actually get to see the money. However, that lack of discipline forces those people to skip step 2 and miss out on future TAX-FREE money.

At the end of the day, which order you choose comes down to whether or not you believe taxes will go up over time. I know I do! PLEASE give me all of the future tax-free money that I can get!


About the Author

By , on Apr 23, 2012
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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  1. Brittany says:

    I understand the 1-3 steps, but I was wondering if you have suggestions about which type of investments to chose in a Roth IRA and employer 401K? My husband and I are both 35.

    • Andy says:

      Hi Brittany!

      I’ll send you an email to address this a bit further as my response will probably be a little long. 🙂

  2. I’ve been learning more about structured products recently since CD yields suck so much and I’m excited about what I’m finding! Will write a post about it soon, and will need the audience’s help deciding which choices to choose.

  3. Carrie Smith says:

    I wish my company did a 401(k) type of thing, since I’d love me some free money. 🙂 But since they don’t I still contribute to my Roth IRA. I can’t wait until I’m debt free so I can start maxing it out. It’s way too risky to hope and pray the government does something that’s advantageous for me in the future. I’d much rather take control now, when the figures aren’t all up in the air.

  4. I’d love to have a SEP someday, but maxing out ROTHS is a chore at the moment.

  5. Nick says:

    No match here, but I “max the crap out of” my Roth and 401(k) either way. 🙂

  6. You’ve called it right FREE Money, I hope you have a big chunck of yung people in your readership because mistakes are definitely made in their earlier years when they fail to take advantage of company matches. Then they end up playing catch up years later.

  7. Philip says:

    Hi Andy, thanks for the post and highlighting the FREE MONEY aspect of retirement savings.

    So many, especially younger people, ignore or disregard this resource available to many. Combined with Tax-free money and Tax-deferred money your proposed strategy is a winner.

  8. AverageJoe says:

    It seems to me that starting is the most difficult part. Once you’ve turned on the switch to save into your 401k (or whatever) you forget about it…..

    • Andy says:

      That’s really true AJ! Eventually things become habit and you simply learn to live without the money. That whole starting thing seems to be the hurdle.

  9. Karunesh says:

    Nice article Andy, Great to see that you offered a concrete plan in the end of article. Usually what happens that people do know the pros and cons of various plans but do not have enough confidence to chalk out there own plans. So giving them a road map to come up with proper retirement plan is very helpful.

  10. I started saving for retirement when I was 21. The balances started growing slowly but surely, even during the dark days of Lehman Brothers and its aftermath. The longer you wait to start, the harder it will be. And…. on that note, I really should implement that thinking to exercise!

  11. Shilpan says:

    Andy, don’t you think that it is wise to max out 401(k) before contributing to Roth? The reason is the tax deferred growth. I agree with you that first priority should be to invest, at least, to match company contribution(FREE MONEY). But I’d choose max out option second.

    1. 401(k) – UP TO THE MATCH
    2. 401(k) – up to the limit
    3. Roth IRA – up to the limit ($5,000/year or $6k/year if over 50)

    • Andy says:


      The Roth IRA is both tax-deferred and TAX-FREE. So, you don’t get taxed on the gains…EVER…if you withdrawal it after age 59 1/2. So if you contribute $50k over the next 10 years and it grows to $250k, that $200k in interest you earned NEVER gets taxed.

      So, it performs precisely like the 401(k) other than the fact that the Roth is funded with pre-tax dollars and the 401(k) just delays the taxes to a later date.

      As I mentioned in the latter part of the post, it really comes down to whether or not you believe taxes will go up. If you do, then I’d go with the order I suggested. If you don’t, then your order will work!

      • Shilpan says:

        Let’s push the fair tax plan! I wish we can do a movement similar to Roth IRA movement for the fair tax plan. It can change the economic landscape of our country.

  12. Katie says:

    It seems like that would be the smart way to go. Unfortunately my employers do not offer 401k’s so I will just have to stick with opening a Roth IRA

  13. I agree completely with your contribution philosophy. I have an HSA account for my healthcare and use that as a modified Roth IRA. The money goes in pre-tax and as long as I use it for healthcare, I don’t have to pay any tax on it. I simply use out-of-pocket money to pay for my medical bills, allowing for my HSA contributions to grow until I get older and will use the money then.

    If you do have an HSA, my advice is to make sure you have your employer deduct the money from your paycheck if possible. The reason is because this way it is completely tax-free. If you use after-tax money, you get to write off your contributions on your taxes, but that is just income tax. You still end up paying Social Security and Medicare tax on that money, or 7.65%.

  14. Lance says:

    Andy, I have been lurking on your blog for a while, but I wanted to know what you thought about Roth 401(k)s. My employer offers them and I think they are great! The match goes into a regular 401(k) so I have some pre and post tax investment money!

  15. Great article. Being self employed I make sure I max out my Roth IRA but I also contribute to a SEP IRA to weaken the blow on the taxes I pay now.

  16. Really nice, logical, easy to follow write-up of the logic of this common dilemma. Thanks for sharing. I’m planning to include it in my next ‘Diamonds & Dogs’ installment. As a Diamond, of course!

  17. Andy says:

    I’m with you Paul…I’m EXTREMELY concerned about my generation and beyond. When I talk about this topic some people look at me like I’m a pessimist. However, I’m simply a realist that looks at facts. Numbers don’t lie.

    We’re going to have some SERIOUS, SERIOUS financial issues (as a country and more-so individually) 30-50 years from now. We’ll certainly have them before then but it will get worse once social security is exhausted of its reserve funds.

  18. Jefferson says:

    While I have been anything but a superstar when it comes to building up my own retirement funds, I have *always* taken full advantage of the company 401k match, even in tough times. I just refused to leave the free money on the table.

    Hopefully when our situation improves, I can start to diversity a bit and expand into Roths, and a few other options.

  19. We’re in total agreement on the order of events, 1 – 3! That’s the order I used and it has been building like crazy! I know so many people that aren’t even to Step 1 yet. Why pass up free money??

    • Andy says:

      I even coach people to get the FREE MONEY even when they’re still in debt. It does depend on how much debt and whether or not they’re high-interest credit cards or payday loans, but for the most part I think it’s wise to get the match.

  20. I’ve actually bookmarked this post. I need to pay much more attention to how I save for retirement. Unfortunately, I lack the discipline like most others who aren’t as astute when it comes to prioritizing retirement savings.

    • Andy says:

      It’s certainly a challenge Anthony and this is one place where most people struggle. The majority of us don’t even make it to this step where we can properly plan for retirement. We’re too busy worrying about the here-and-now.

  21. Modest Money says:

    You make me jealous of all the people who work for a company that matches their savings contributions. I can’t say I’ve ever worked for such a company, mostly because I usually work for smaller companies. I’m definitely missing out on a huge perk though. If I had that option I would be taking full advantage of it.

    • Andy says:

      It is certainly a huge perk and one that must be taken into consideration when weighing job offers.

      Did you see the post Sam wrote a few weeks back about Australia’s benefits? He mentioned that ALL employers MUST contribute 6 or 9% of the employee’s salary into a retirement account. So awesome!

      • Modest Money says:

        I can’t say I bother to read any of Sam’s posts lol. I prefer to stick with bloggers I personally like. That Australian employment law sounds great though. Good way to make employers’ fund people’s retirements instead of having the government cover it.

  22. I prefer winning the lottery or getting an inheritance, seems like less work than thinking about all this. 🙂

  23. Jeremiah says:

    Speaking of free money, there are even firms that will give you $50 by simply opening an account such as a Roth or Traditional IRA. I’m all about Free money, especially when it comes to my retirement.

    • Andy says:

      That’s definitely a great benefit Jeremiah! I’d suggest the companies giving the free $50 are only doing so because they want to manage your investments? If that’s NOT the case then I’d be curious to see what’s the motivation behind such a nice gesture.

  24. There are so many people who negelect even to receive the company match…Cmon people it is freeeeee money!!!! Working in the hospital finance portion I can see the behind the scenes of everyones deductions and the amount that people contribute to the total payroll is pityful!!! I do not know what we have to do to motivate people but people are not using their 401k at the rate they should be!!! I know the company appreciates it as they do not have the added expense for matching contributions.

    • Andy says:

      You’re absolutely right Christopher: I’ve talked to numerous HR people and they ALL talk about how poor their company’s participation rate is. They constantly thinking of ways to increase it.

      I’ve seen multiple studies that show the majority of employees are simply unaware the employee benefits their employers provide. When we’re talking about the 401(k), I believe education helps and understanding how important the match it. However, from what I’ve seen I also know that it really starts with teaching people how to budget and live below their means. We want people to save but they just want to figure out how to pay their bills and get through the month.

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