Save with a Roth, save with a 401(k), but above all: save

The Baltimore Sun

The steep, and continuing, decline in the stock market isn't the only hit to 401(k)s. A growing number of employers are suspending matching contributions to workers' accounts as the recession drags on.

At least 66 companies, including 7-Eleven, Eddie Bauer, FedEx and the Big Three automakers, have announced plans to change or suspend matching contributions to the 401(k), according to a running tally by the Pension Rights Center.

Financial planners usually advise workers at the very least to contribute enough in the 401(k) to get the full employer match. But what if your employer stopped its match? Does it still make sense to invest in the plan?

There are two schools of thought on this, though financial experts unanimously agree that workers should keep saving.

Stuart Ritter, a financial planner with T. Rowe Price Associates, argues that with no match, workers - especially those under 50 - would be better off contributing to a Roth IRA before the 401(k).

"The definition of success that we use is which one will give you more spendable income in retirement," he says.

With a 401(k), your contribution goes into the plan before you pay taxes on it. You will owe regular income tax on your contributions and any earnings when you take the money out in retirement.

To make a full or partial contribution to a Roth this year, your income must be under $120,000 if single or $176,000 if married and filing a joint tax return. With a Roth, you contribute money after you have paid taxes on it. But in retirement, you won't owe any taxes on withdrawals.

In theory, it shouldn't make any difference if you get a tax break upfront with a 401(k) or at the back end with a Roth if you remain in the same tax bracket through life. But Ritter says, based on how workers actually invest, the Roth is the better option.

And if your tax rates are higher in retirement, the Roth is even more attractive, Ritter says.

Higher taxes in the future are a likely scenario, given government spending these days.

But there are limits. The most you can contribute this year to a Roth is $5,000, or $6,000 if 50 or older.

"For many people that's not going to be enough," Ritter says. Generally, workers should save 15 percent of gross income for a secure retirement, he says.

"At the end of the day, you should do both" the Roth and 401(k), Ritter says.

In a 401(k), you can sock away up to $16,500 this year, plus an extra $5,500 if you're 50 or older.

Joel Dickson, a tax specialist with the Vanguard Group, says workers shouldn't give up on the 401(k), even without a match. You still get a tax break upfront and your money grows tax-deferred, he says. And, he notes, the loss of an employer match might be only temporary.

"One risk of stopping contributions is that you don't start them up again," Dickson says.

Also, with a 401(k), the employer selects several investment choices for you, which can be helpful if you're overwhelmed by the thousands of potential investment options out there. With a Roth, investment options are wide open, a perk for hands-on investors.

Bottom line: If your employer reduces or suspends its match, you have to save even more for your retirement to make up for the loss.

Younger workers with limited funds and who expect to be in a higher tax bracket in retirement should first consider a Roth. You can set up automatic withdrawals from your bank account to a Roth to make investing easy, Ritter says.

But for many of us, the 401(k) will still be the first choice because of the larger contribution limits and the sheer ease.

The worst move, though, would be to stop saving because of the weak stock market or the suspension of a 401(k) match.

"If you save nothing, you have nothing," Ritter warns.

Suggest a topic at eileen.ambrose@baltsun.com or 410-332-6984.

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