I am a big believer in socking away as much money as you can for retirement. If I could put 50% of my income away I would. However, I can’t because financially it would impede my ability to pay….well, my bills. However, I am able to put a nice chunk of money away every year and every year I try to increase it. For 2017, I am not trying to decrease the amount of my money I say, but I am trying to figure out what my priorities should be when investing.
My Investment Accounts
Currently, I have three different retirement accounts. I have basically a 401k plan, which I am required to put 11% of salaried earnings into. My employer will put in 4.3%. Additionally, because I am a government employee I can also contribute to a 403(b) plan, which is basically like a 401k for non-profits. Most of the time you have to pick one or the other. The reason I can do both is because the 11% contribution for many of my colleagues is into a pension plan. I chose not to be part of the pension plan and I still think it was the right choice for me personally. In that 403(b) account I actually put more money in their technically per year than I do my 401k plan. Finally, I have a Roth IRA. However, I haven’t really contributed to my Roth IRA over the past two years, except for any kind of cash back that I get from my Fidelity Rewards card.
Here is my dilemma. I cannot change the contributions on my first plan I am locked into that by law. However, I can change the contributions on my 403(b) if I wanted too. My dilemma is this. Should I take the money that I put in my 403(b) plan and contribute to my Roth IRA first and then when I reach that limit go back to the 403(b) plan or just continue what I am doing.
Advantages and Disadvantages
There are several advantages to both approaches.
First, if I increase my Roth IRA contributions the great thing is that they grow tax-free. I can just invest and watch them grow.
Second, I wouldn’t be reducing the amount of money I save, but actually just re-prioritizing where I put my money.
Third, if I put Roth IRA contributions first I could probably save the maximum year contribution in the first 4-5 months and then I just contribute the rest to my 403(b) and get the same contributions.
There are some disadvantages to this plan.
First, my reducing my 403(b) contributions I also INCREASE my tax liability. I don’t get a tax write-off from my Roth IRA.
Second, a question I would have would I be disciplined in putting this money back in investments. For example, if I reduce my 403(b) contributions my paycheck obviously increases, which is fine. I can arrange, fairly easily, to do bi-weekly deposits into my ROTH IRA. However, when I reach the maximum contribution limit then I could easily say well that extra money I could use to pay off debt or travel or whatever. Will I have the discipline to put the money back, particularly when the time to do so will be during the summer, which is usually a much tighter time financially for the ROB household.
Third, I have, in the past, attempted to use my Roth IRA as an emergency fund. That didn’t work out very well. I took that money and then put it toward paying off other debt. Right now I actually have about 3 months of the 4 walls saved in a basic savings account that I have vowed I will not touch unless it is for emergencies. However, would I be tempted to take the contributions I have put in the Roth IRA and use them to pay off debt. So far I have never cashed out investments, but I worry I might.
So my dilemma is what do I prioritize? Do I put more money in my Roth IRA and then into my 403(b) or do I stick with what I am doing?