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Asked 2/5/2008
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Max out 401(k), or add in Index Funds? Assume a situation where a mid 30's adult can invest 15% of their yearly salary. They work for a company who's match for 401k is 6%. Assuming the individual is not eligible to contribute to a Roth IRA, which is a wiser investment strategy? |
Answer 1/3 - Submitted 2/5/2008
I would max out the 401(k) contribution, even going above the matched contributions. Most 401(k) plans will offer one or more stock index funds as part of the plan, so you still are earning the maximum long term return in the Plan as you would outside the Plan.
The benefit of it being in the Plan is you won't spend it (can't, without a penalty), and the interest is cumulating tax deferred... meaning that you have more of your money (and your money's money) working for you.
The only reason to not max out the 401(k) is if you think you will need to use it before retirement, and if you would face a penalty for early withdrawal.
Answer 2/3 - Submitted 2/5/2008
Max the 401k to get the tax deferral. Even though index funds are tax efficient, take full advantage of the tax deferral that the 401k offers. With the income that you must be making to exclude you from the Roth you should deffer any tax liability you can.
Answer 3/3 - Submitted 2/5/2008
I would max out the 401(k) contribution, then invest any excess in tax-efficient growth funds or municipal bonds.
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