The decision on Roth vs. Traditional IRA can be tricky, but you are correct to point out that it is when you want your tax burden. With the Roth plans (which now include both IRAs and some 401(k) plans) you pay taxes now. With the traditional plans (most 401(k)s and 403(b)s), you pay them later.

Many people will - in retirement - live on less annual income than they do now. They have no kids, no house payment, no insurance, etc. So, a 100K income earner might only need 70k in retirement to have the same standard of living. In that case, the traditional plan works better since the tax burden is lower.

However, if you are really savvy and expect to have a lot of investments, and a lot of wealth, then you may find that you will have a higher income in retirement - and that you want to enjoy it. That makes the Roth plans better since you’ve already paid taxes.

Personally, I’m doing a hybrid. I am fully funding (10K) the Roth IRA plans, and putting another 7k in the traditional 401(k). The reason I’m putting more in the Roth now is that I’ve been heavily invested in the traditional for many years, but just started with the Roth.

The other reason to like the Roth over the 401(k) specifically, is the options. WIth a personal Roth account, you get all the market as potential investments. In the 401(k), you just have the company choices.

So, to go back to the list, I would redo it slightly:

1) Fund tax-favored company retirement plan to maximum match (typically 3-5%)
2) Fully fund personal IRA account (Roth preferred, but Traditional okay)
3) Assuming you haven’t gotten to 15-20% of your income in retirement yet, fund tax-favored company plan to that level.

I owe about $46K on my $110K home and as a family, we are trying to get that paid off early. We have a 15 year loan and are on year 5. We think we’ll be able to swing getting it paid off within the next 5 years if all goes well and the creeks don’t rise (my mom’s expression). Once that happens- I’ll have about 5 years to get ready for kidlets and college. Not that we aren’t already saving- but with the mortgage out of the way, it will be infinately easier.

My family of 6 lives on my modest income alone- hubby stays home with the kidlets and devotes her time to shopping smart, keeping the house in order, growing our veggies in the garden and when school is in- doing the bigger home projects so we don’t have to pay others for the work. We put 15% of my income in an untouchable, its-the-3rd-rail, save for retirement 401K with 5% of my income matched by my employer (so basically 20%). 3 out of 4 kids warrant a monthly stipend from the state (we adopted from fostering). This is divided by 4 and goes into their college savings plans–except a few hundred dollars/year for scouting, day camp, music lessons thru the school, or other learning experiences we all agree on.

I think we have our goals and money management well laid out- even though we don’t work a “budget” per se. We are so tight on the pennies, Lincoln cries.

Evelyn Guzman
Debt Challenger