Long time lurker, first time asker here. I've seen some similar questions to mine here, but nothing exactly in the same circumstance.

I've seen almost near-consensus that the ordering for investing should be as so:

  1. Fund an employer's 401(k) up until the point that you get the most out of their match.
  2. Fund a Roth IRA until you hit the yearly maximum.
  3. Fund your 401(k) until you reach that maximum.
  4. If you have further cash to invest, you have to put it in an account that is not tax-sheltered.

Right now, I'm contributing 10% of my paycheck to the company-sponsored 401(k), but the company does not offer any sort of match right now, but it is planned to resume in the near-future. Given that there is no match, I was wondering if it would be a better idea suspend or reduce the amount I'm contributing to the 401(k) and move that into another investment vehicle, like a Roth IRA. I also have the option in my 401(k) plan to put a portion of my money in a Roth 401(k).

I'm currently 22 and have no major debts --just daily expenses put on a credit card, which is always paid off at the end of the month. I'm in the US.

  • 6
    Not a full answer, but one advantage of a 401k is increased protection from lawsuits. You can also roll to an IRA when you get a new job. A 401k downside is the company has often done a poor job picking a custodian and available investment vehicles.
    – Havoc P
    Commented May 26, 2011 at 2:27
  • Just make sure you keep saving the 10%! That's a good habit to have, and easier to live with once you've been doing it for a while.
    – Peter K.
    Commented May 26, 2011 at 12:34
  • Thanks for all the answers, everyone! I seem to have forgotten one important bit in my question, which may or may not change the answers: that any money I don't put in the 401k is going to go to another account, probably a Roth. I also have the option with my current 401k to put a portion of my money in a Roth 401k.
    – bhamby
    Commented May 26, 2011 at 12:52
  • I'm not a financial adviser and don't really know what I'm talking about, but when I was your age I spoke to one and he explained to me that, at your age, you likely have the lowest tax rate of your career which makes the 401k a slightly worst option than a Roth since the taxes on withdrawing the 401k at retirement will likely be higher than the taxes on putting it into a Roth now instead. This is assuming your income now is less than it will be at retirement (and given inflation). Commented Oct 1, 2021 at 14:54

7 Answers 7


I think you're doing the right thing. One of the benefits of tax-deferred account, aside of it being tax-deferred, is that it keeps the money locked from you. Some people think it's a bad thing, I think it's a good thing. The amount of money locked is not that significant relatively to your income (10% in your case, which is a lot relatively to others of your age, and shows that you think ahead and plan for your future), but it builds up a cushion to fall to when you're old.

Many people don't think of the time they're old, or think they'll be the same or better (income-wise) as they're now. That is not so. Although during the period of your life your marginal tax will indeed grow, in the end it goes back down again for most of the people, and that is because your income goes down. It is then that you need the money you're putting aside now, and the more you put aside, and the earlier you put it aside - the more you will have then.

The fact that it's locked promises that you will have it then, not before when you want to buy a house you can't afford or impress a girl with a car you can't pay for.

In my mind that's the best benefit, and the fact that the earlier you start putting the money there, the more gains it will acquire until you actually need it.

So keep up the good work, and save for your future, lock out that 10%, and invest the rest in other channels which may be more risky and with more potential gains.

  • 3
    +1 for keeping the money "locked", or at least with a penalty for accessing it. I've found that's the best strategy for me with respect to savings: make it easy (automatic) to go in, and hard (penalties of some sort) to get out --- at least before retirement.
    – Peter K.
    Commented May 26, 2011 at 12:32
  • There are so many good answers here (I'd accept all of them, if I could!), but I think I like the approach of having a "locked" mentality the best.
    – bhamby
    Commented May 27, 2011 at 13:46

Let me throw in one more variable to consider.

Company 401K plans typically have MUCH higher fees than you are likely to get if you shop around on your own as long as you don't go with a high dollar broker. You won't see these fees on your statements typically, which I think is criminal, but they are hidden in the prices of the funds you are buying in the 401K.

If you don't believe me, get the quotes for a fund from the 401K company's web-site then look up the same fund on a site like MSMoney. The share prices won't match and you will be angry until you come to terms with it.

So if you have a choice of money in a personal retirement account versus a 401K always go with your own account... UNLESS:

  • You aren't disciplined enough to keep investing that money every month without the ease of having it taken out of your paycheck automatically. (be honest with yourself).


  • The company is matching, which you said they aren't. Free money will more than make up for the extra fees in almost all cases.
  • While it is always important to pay attention to fees and JohnFx makes some good points here. It is very important to note that the fees would have to be extremely excessive and you would have to work at a single place for longer than most people do for the fees to outweigh the tax advantages. Especially, if you are young.
    – rhaskett
    Commented Jan 13, 2015 at 20:43
  • Not everyone rolls over when leaving an employer, in fact most of my co-workers have never even thought about it. Quite shocking to me! My point being that it makes the weighting of fees more important than you're implying.
    – davmp
    Commented Jul 29, 2017 at 20:12

Since there is no match on the 401k, it seems to me that your first priority should be your IRA (Roth or otherwise).

I don't know what your salary is, but most 22 year-olds won't be maxing out both an IRA and 401k on only 10% of their incomes, so the rest of the list may be irrelevant.

  • No reason one must confine retirement savings to only 10% of one's income. It's certainly possible to save more, depending on one's near term and medium term financial goals. I've always viewed 10% as a minimum, not a maximum.
    – justkt
    Commented May 27, 2011 at 13:26
  • @justkt, I agree completely. The questioner mentioned that he was saving 10% of his income for retirement, so I used it in my answer.
    – Sean W.
    Commented May 27, 2011 at 15:59

I humbly disagree with #2. the use of Roth or pre-tax IRA depends on your circumstance. With no match in the 401(k), I'd start with an IRA. If you have more than $5k to put in, then some 401(k) would be needed.

Edit - to add detail on Roth decision. I was invited to write a guest article "Roth IRAs and your retirement income" some time ago. In it, I discuss the large amount of pretax savings it takes to generate the income to put you in a high bracket in retirement. This analysis leads me to believe the risk of paying tax now only to find tHat you are in a lower bracket upon retiring is far greater than the opposite. I think if there were any generalization (I hate rules of thumb, they are utterly pick-apartable) to be made, it's that if you are in the 15% bracket or lower, go Roth. As your income puts you into 25%, go pretax. I believe this would apply to the bulk of investors, 80%+.

  • You are over-simplifying the Traditional vs Roth discussion IMO. For my money, the lack of an RMD that comes with a ROTH is a huge advantage that should also be considered. Also of use would be the flexibility / ability to withdraw contributions after 5 years without any penalty -- although I wouldn't recommend doing this, having the option is a benefit.
    – davmp
    Commented Jul 29, 2017 at 20:14
  • @davmp - reread my answer. Consider what it takes to get into the 25% taxable bracket. I'm sticking to my answer. Truth is, one needs to analyze the specific situation before deciding which account to use. There are too many variables to have an exact answer here. Commented Jul 29, 2017 at 20:50
  • JoeTaxpayer - the edit portion of your answer here only mentions tax bracket considerations, so I stand by my comment that this is an oversimplification of the decision Roth vs Traditional.
    – davmp
    Commented Jul 29, 2017 at 20:59
  • Fair enough, let's agree (?) there's a lot to consider. Commented Jul 29, 2017 at 21:07

Congrats on saving aggressively when you're young.

I'm not a huge fan of tax-advantaged accounts because the rules can change on them, and there's already a penalty for you to take out that money for most purposes until you've almost tripled your age.

Free money (a match) overcomes this reservation for me, but I'm not contributing anything beyond that. I'm paying my taxes on the rest and am done with them.

Watching your money grow tax-free for another 37 1/2 years only to see your (and everyone else's) marginal tax rate rise isn't much fun. I'm not saying that will happen, but it certainly could.

  • +1: Agressive saving. -1: Tax-advantaged accounts. +1: The rest. So, on balance +1. :-)
    – Peter K.
    Commented May 26, 2011 at 12:35
  • 1
    I disagree. Roth IRAs are tax advantaged when you withdraw the money, not when you deposit, so you are safe from changing tax rates. In addition, you can withdraw contributions to a Roth IRA penalty-free at any time, and you can withdraw contributions and gains penalty-free for certain expenses (e.g., buying your first house).
    – Jeremy
    Commented May 28, 2011 at 16:09
  • @Jeremy: That's what the rules are now. They can change at any time.
    – mbhunter
    Commented May 29, 2011 at 2:05
  • True - but I think they are probably pretty safe for these reasons - money.stackexchange.com/questions/7619/…
    – Jeremy
    Commented Jun 1, 2011 at 0:29

Didn't see it mentioned so far, but depending on modified AGI you may be prevented from a tax deduction for your contribution to a Traditional IRA if you or your spouse are offered a retirement plan at work, even if you don't participate in it. See the IRS page here for the details of deduction limitability: https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

In my opinion, because I heavily favor all the benefits of the Roth, I'd contribute first to a Roth IRA and then to the Roth 401(k). The former first because it puts the money in a place where you have more control over fees and how it is invested. The latter because the contribution limits are much higher than the IRA, and the money grows tax-free and incurs no taxes on withdrawal.

  • 1
    +1 for a well articulated answer. I still feel one shouldn't ignore tax brackets in the decision making process. I retired 5 years ago at 50, there was no Roth for most of my working life. Deposits to the 401(k) went in at 15-33% brackets, and are coming out at 15% max, or sub-10% average. Commented Jul 29, 2017 at 21:04
  • Oh, I fully agree with you, don't ignore tax brackets! In my case, I predict tax rates going up by the time I retire, plus for those saving a considerable portion of their earnings now and doing well on growth of those savings, you might be in the same tax rate or even higher when you withdraw. Unless it was a Roth, of course. If you direct part of savings to a Roth now, you lower the tax rate for the taxable portion later. And you possibly avoid making your SS taxable too.
    – davmp
    Commented Jul 30, 2017 at 11:03

As some of the other answers pointed out, company 401(k) accounts can sometimes have poor investment choices so if the company isn't doing some sort of matching and you only have a limited set of options, I would likely recommend that you roll the money over to a different 401(k) account so you have better investment options. Why choice from tens of funds when you may have the full market worth of options as your disposal? Likewise, if you have electronic deposit you might be able to have the 10% automatically deposited to that account out of your paycheck so you will still be getting the advantage of having "forced savings" from a young age.

In regards to a Roth IRA, as others have pointed out, they are a bit of a gamble and you can't ensure that you will come out ahead at the end of the day in regards to taxes; however, you also need to take your own career goals into account when you make that decision. If you see yourself getting up there in the income bracket of the course of your career it doesn't hurt to have a Roth IRA now and start putting some money in it (limited amount though, maybe only $100 a month) but if you don't see yourself getting up that high in the income brackets then it might not be worth the overhead of having multiple accounts to keep track of.

That said though, make sure that you aren't just saving for retirement, you should have another savings account that you are putting money away for rainy days, houses, and the like.

  • Many employers won't let you rollover out of a 401k while still employed. I was surprised to find that some do as I'd never heard of that capability until recently.
    – davmp
    Commented Jul 29, 2017 at 20:27

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