Which should I give priority to for allocations-a Roth IRA or my pretax employment retirement account?

I'm a government employee and have access to a pretax retirement account. I'm currently the maxing out the allowable $14K in annual contributions to my pretax retirement account. However, I just opened up a Roth IRA account, but have no money funded. Should I reduce my employment retirement account contributions, so that I may begin contributing money to my ROTH IRA? I currently make about $50K annually.





Which should I give priority to?

Which should I give priority to for allocations-a Roth IRA or my pretax employment retirement account?
I would lower my contributions to my employer's retirement plan and make contributions to my own Roth IRA. Its more likely that your employer's retirement plan probably has some crappy investments in it and some good investments in it.





With a Roth IRA, you can pick a variety of mutual funds that matches your investment objective. I don't know how old you are, but the younger you are, the more aggressive investor you should be. The older you get, the more conservative you should be. So, if you want best of both worlds, I would diversify the IRA that contains aggressive growth fund and income and growth funds. You want to stick with the same fund family so that later on you can get sales discount.





If you leave your job, you can rollover your employer's retirement plan into a traditional IRA. If you leave the job after 2010, you can roll it over into a Roth IRA.
Reply:You ask a very smart question. Too many government workers have had to go out and find a new job after retiring. It's mostly because they did not ask enough questions.





If you want to grow your retirement nest egg at a faster rate than your employer retirement plan, reducing your contributions to the plan makes sense. The accounts that I have seen over the past year are growing at a net rate of 9% on average, which is not bad, considering they are invested in mutual funds. But, your pre-tax benefits are not critical at your tax bracket, which is why the Roth IRA is worth considering.





Probably the most compelling reason to reduce your contributions to the employer's plan is the opportunity to make your own investment decisions with a chance of getting greater returns, tax-deferred. For example, if you contributed $5,000 to $7,000 to a self-directed IRA, the annual growth rate can be anywhere between 10 and 20 percent, or more. A $500 monthly contribution ($6,000 annually) growing at the compounded rate of 15%, accumulates to $380,000 in 15 years. You may think of it as an opportunity that is worth investigating.





To get a better return on your money, you would have to be a watchful investor and/or get help from a qualified investment counselor. Plan ahead and find a strategy that will make sense to you before making any changes. With the foregone advice, I will suggest you learn how to invest in small cap stocks and closed-end stock funds (different from mutual funds). Happy hunting!





Hawk
Reply:The answer to your question depends on your age. If you are young (say under 45) I would decrease your retirement account contributions and put more in a Roth IRA. The whole point of the Roth is to pay taxes now and walk away without paying taxes come age 59 1/2 - if you have a lot of time to grow it this should be way more beneficial assuming you invest wisely and make a decent yield. PLUS, you are diversifying your money and that is ALWAYS a good thing. If you are older I would start a traditional IRA too. I started an IRA with gold and silver and that has done VERY WELL for me. Even if you don't invest in gold and silver the guy I spoke to was very helpful and knowledgeable. Their website is www.goldira.com and it has the phone number on the site.
Reply:Of course you need to prioritize your pre-tax contributions. Pre-tax contributions reduce the amount of your compensation subject to income tax. Contributions to a Roth-IRA is made after tax, so increasing your contributions to a Roth-IRA would not reduce your current tax liability.
Reply:Keep on contributing to the pretax account. If you have left over $$$, then do the Roth.

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