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I've continued to read advice at Dave Ramsey's site, and I discovered his advice on 401(k) vs Roth IRA;*

The bottom line is that he suggests depositing in a 401(k) until the match is maximized, them max out a Roth, then back to the 401(k). If no match, then start with the Roth, and go to the 401(k) after that.

This month, by coincidence (indeed, I wrote my January 07 401(k) ripoff story in Mid-December, and found the Ramsey story close to year end. I considered it serendipity as I wasn't expecting to find a Ramsey article that could provide an intro to my monthly feature.

Now, on Dave's page he certainly had enough room to comment further, but chose not to. He missed the most important part of the answer. How much are the annual expenses within the 401(k)? As my article this month elaborates, most advisors are under the assumption that expenses are similar between the 401(k) and any post tax accounts. This can be a fatal mistake, fees can run as high as 2-3% at a small company. Read my January feature story and decide for yourself. If your company 401(k) has a low expense ratio among the options, then my advice would match Dave's. If the expense is high, I'd advise to grab the match and call it quits, not investing another cent beyond that in the 401(k)

On a final note, my math compared a 401(k) to a taxable account over a 20 year period. For the late starter, who has little in savings, but a high income, the math will work differently as the person in question may be saving money in the 28% bracket, but land in a 15% bracket at retirement. That 13% tax differential can overcome some bad expense ratios. Again, though, it's important to read anyone's advice and decide how the information presented applies to you. For an answer to your specific situation please drop a note from my main page.


*The link to this specific article is within his Money Makeover site, so you can read the full article if you feel I've taken him out of context.