Roth IRA vs 401(k)

We currently have $12,688.05 invested in my company’s 401(k) plan and $630.00 saved up to begin funding Roth IRA’s for my wife (minimum required to open a Vanguard Roth IRA is $3,000).

The 401(k) money was accumulated (no company match) over the past 5 years of off and on investing without a plan or a goal. Now that we do have a plan and a goal, we have decided to focus on fully funding our Roth IRA’s this year, while still contributing a small amount (2% of my salary) to my company’s 401(k) plan. The Roth IRA money will be invested in the Vanguard 500 Index Fund.

The main reasons we choose to focus on the Roth IRA’s are:

  • The average expense ratio of Vanguard 500 Index Fund is just 0.18%, while the average expense ratio of our 401(k) investments is 1.48%
  • The Roth IRA principal can be withdrawn penalty-free, while the 401(k) has limited loan availability
  • The Roth IRA has no mandatory withdrawals, while the 401(k) withdrawals must start at 70-1/2

Since Roth IRA contributions are limited to $4,000 in 2007 (increases to $5K in 2008) we will be investing a total of $8,000 for my wife and I this year.

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