Question: My goal is to save 15% of my salary. I have a 401(k) plan at work. I also have a personal Roth IRA and taxable brokerage account. How should I prioritize my savings?
Building a Nest Egg
Dear Building a Nest Egg,
Your savings goals are admirable! Make sure you get any free or matching money, and then focus on tax efficiency.
Before you focus on retirement savings, I always like to make sure an emergency reserve account is funded. We all know people who have unexpectedly lost their jobs. So I recommend you put three to six months of living expenses into an account you could access quickly in the event of an emergency.
Your next priority should be retirement. If your employer offers a 401(k) match, start your savings here. At minimum, many employers match the first 3% of your savings. This is free money that you can’t afford to pass up.
For those that income qualify, typically the next best place to begin is by adding $5,000 in a Roth IRA. Income phaseouts for Roths begin at $105,000 (modified adjusted gross income, or MAGI) for single filers and $166,000 (MAGI) for joint filers. A Roth provides flexibility because you can access the principal at any time without penalty. Like a traditional IRA, a Roth allows your money to grow tax deferred. But unlike a traditional IRA where you will pay ordinary income tax when you begin distribution, Roth money comes out tax free. And with the income tax debate currently controlled by legislators advocating even higher rates, I don’t think you will regret having some tax free money.
Stash any remaining money and invest it in your taxable brokerage account. Following these steps will ensure your retirement egg is golden.
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