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For the past few years I have been contributing to my company-sponsored 401k just enough to get all of their match, and contributing up-to-the-limit in a Roth IRA.

I've now reached the income limits for the Roth IRA (which seems like a good problem to have), which means that starting now I must find some place else to put the contributions that would have been going into the Roth IRA each year.

Is there any generally accepted advice on where the next best place is to invest money for retirement when Roth IRA is no longer an option? Seems to me like my choices are:

  • Invest back into company-sponsored 401k
  • Traditional IRA, which offers no deduction benefits
  • Invest on my own in an individual brokerage account.

I understand that no answer for advice can be truly objective or "the right answer", but I'm mostly curious if there is any conventional wisdom on what to do next.

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What are the investment criteria you are most concerned about for the additional money? Tax sheltering, High Growth, Safety, etc? –  JohnFx Mar 23 '11 at 18:15
    
@JohnFx, I would say a mix between high growth/risk (my potential retirement is at least 3 decades away) and moderate - I don't want to be too risky, yet I also don't want to invest in just t-bills. My current investment allocation is mostly toward index funds for equities. –  matt b Mar 23 '11 at 19:19
    
See also money.stackexchange.com/questions/6796/… –  bstpierre Mar 26 '11 at 3:26

4 Answers 4

First, if it's just about the income limit, you can deposit to a regular IRA and soon after (like next day) convert it to a Roth. So long as you have no pretax IRA money out there, there will be no tax consequence, a cent on a day's interest, perhaps.

As far as the 401(k) goes, are the options any good? Some 401(k) investment choices are so awful it's best to stop after getting full matching. Mine has an S&P index fund with a .05%/yr expense ratio. That's less than I can find in the best ETF out there.

Keep in mind, if you invest long term, the dividends are favored, 15% rate, and the capital gain is both controllable (you decide when to take it, by selling) and also favored, 15%. The magic of 401(k) and IRAs, whatever kind is a bit overplayed in the media. Your investing rate and asset choices are far more important.

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Forgive my nativity on the matter: What do you mean by "Mine has a .05% S&P index."? –  corsiKa Mar 24 '11 at 1:53
    
I fixed wording to be clear. S&P fund with .05% expense. –  JoeTaxpayer Mar 24 '11 at 2:57
2  
By the way, the word is naivete. Your creche needs no apology... –  JoeTaxpayer Mar 24 '11 at 19:18
    
What would be the benefit of depositing to a regular IRA and then converting it to a Roth compared with, say, depositing to a standard brokerage account? –  matt b Mar 25 '11 at 17:07
    
once in the Roth, the money grows tax free, and upon retiring ,withdrawn tax free. –  JoeTaxpayer Mar 26 '11 at 3:57

The contribution limits for an IRA extend across both traditional and Roth IRAs. If you have both a Traditional and Roth, you are limited to $5000 in contributions to both ($2500 in each, $5000 in one and $0 in the other, etc). Opening another IRA in this case wouldn't really help you out.

I've always heard the conventional wisdom to be:

  1. Emergency fund
  2. Max out any company-matched 401(k)
  3. Max out Roth IRA
  4. Max out 401(k)
  5. Taxable brokerage account
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"The contribution limits for an IRA extend across both traditional and Roth IRAs." Are you sure about this? My impression was that there is a limit to any contributions to a Roth IRA, but for a traditional IRA there are only limits to what you can deduct –  matt b Apr 11 '11 at 13:25
    
@matt b, good point, you can contribute more to a traditional IRA, but I think the $5000 limit applies across both. So if you contribute $3000 to a Roth IRA, you can only deduct $2000 on your traditional (even if you contribute more than that amount). –  harwig Apr 11 '11 at 21:18

I'd personally use a standard brokerage account and invest in a mix of mutual funds, ETFs and individual stocks.

Follow the municipal bond markets and be prepared to move into muni funds or ETFs when opportunities present themselves. If you buy on weakness, you can pull some great returns with reasonably safe investment.

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A 529 plan!

The savings can only be used for education purposes, but you can use them for ANYONE and even change the beneficiary. Distributions are tax free, and contributions are usually state tax free.

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