Is there a good rule of thumb for determining how much money to put into each type of account? I'm not at a point where I can max both my 401k, my ROTH IRA, and my wife's ROTH IRA, so I'd like to know where to put my money.

I realize that a lot of this depends of my current tax bracket (25%) and what I expect from the future, but I'm looking for some guidelines so I can make a good decision.

4 Answers 4


I'd look at Fairmark and understand where in your current bracket you fall. If you are only a bit into that 25% rate, I'd go pretax so you end the year right at that level $69K in 2011. I'd Use the 401(k) to capture any match your company offers, and then use the IRAs for the rest. It would take quite a bit saved for retirement to retire you into the 25% rate, so take advantage of that 15% while you can.

  • Thanks for the info. In my particular case, I'm way into the 25%, and won't be able to go down to the 15% bracket. Furthermore, we get 3k into our 401k no matter what we contribute. Jan 19, 2011 at 0:07
  • 25% ends at nearly $140K. Say that drops to half, $70K. You would still need $1.8M to produce that $70K. I'd go pretax all the way. (Yes, a bit oversimplified, but not much) Jan 19, 2011 at 1:29

You're going to have to guess where your income will fall once you retire. If it's low enough, then a 401(k) or traditional IRA (where the taxes are deferred until retirement) would be the smarter choice.

If your projected income is higher (usually the case for people in their 20s or people with larger amounts invested), then the ROTH makes sense because of the tax free growth.

  • Yeah: Roth IRAs for young people who expect to earn a lot more in the future and retire rich. Doubly so if you expect tax rates to rise, or want to save for a home down payment.
    – user296
    Jan 19, 2011 at 20:39

Common investment advice recommends paying off all debt before you invest. This is certainly not debated when the debt is credit card debt or other high interest debt. Some would argue this doesn't necessarily apply to school debt or mortgage debt, however its not clear what to suggest. Since any investment you make is unknown whether you will win or lose money, and every debt you have is guaranteed to be a loss via interest, its almost always a good idea to pay off all of your debt first.

  • I have no debt other than my mortgage; I'm not really interested in paying it off given the current circumstances. :) Jan 18, 2011 at 23:23
  • Michael - I'd suggest the 401(k) match over repayment of any debt. OP asked between tax status of accounts not specific investment recommendations. Jan 18, 2011 at 23:27

I'm not a big fan of tax-advantaged retirement accounts.

The rules on tax-advantages accounts can change at any time. It's already painful to get money out before retirement (earnings or possibly contributions taxed as current income, plus 10% penalty). The rules could get worse.

There's also the assumption that your taxes will be lower when you retire. I think this is a poor assumption.

If you get free money from your employer for contribution to a 401(k), contribute up to what will get you all of the free money you can. Otherwise, pay your taxes and keep control of your assets.

So short answer: Keep as much as you can out of tax-advantaged accounts unless you're turning down free money to do so.

  • 1
    Isn't "take your money (principal) out at any time" the idea behind Roth IRAs, though? Heck, they'll even let you take out the earnings free if you're buying a home, which is probably the biggest reason you'd take stuff out anyway.
    – user296
    Jan 19, 2011 at 20:36
  • @fennec: Yes, that's true of Roths, but not traditional IRAs. The earnings on Roths are still subject to tax/penalties for all but qualified distributions, though.
    – mbhunter
    Jan 21, 2011 at 4:35
  • The rules on anything could change at any time. There could be a tax increase on income beyond a certain amount at which point, it would be even a better idea to start an IRA. Also the tax free nature means that you can invest in dividend paying stocks and not have to pay tax on the dividend, allowing them to grow faster.
    – chrisfs
    Jan 24, 2011 at 3:11

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