I just received the following comment from NCN of NoCreditNeeded, and I thought it was worthy of a post of its own:
Suppose you could invest in any and all types of retirement accounts, and there were no income limits, etcâ€¦ How would you â€œrankâ€ the different types of accounts? In other words, if you could invest in a 401(k), 403(b), Roth IRA, etc., how would you decide which to invest in FIRST, SECOND, THIRD…
Off the top of my head, here’s my answer…
I would start by making any contributions that come with matching funds. Once I maxed out the matching funds (= free money), I would move on to the Roth IRA. After that, I would go back to making deductible contributions. In some cases, there’s no choice left to be made at this point… Many people have a 401(k) and that’s it.
Assuming that I had more than one choice, such a a 403(b) and a 457(b), I would rank these by the available investments. If one has great, low-cost funds, then that’s the one I would go with first. After that’s maxed out, then I would move on to the other one.
In fact, this is exactly what I’ve done. My employer compels me to contribute 5% (no more, no less) to a defined contribution plan, to which they add a little better than 8%. In the past, my top priority after that has been maxing our Roth IRAs, although that’s no longer an option for us as we’re bumping up against the income limits.
After that, I turned to an optional 403(b) (and I later increased our contributions to take full advantage of it). This year I opened the 457(b) in order to maximize our retirement savings.
The reason that I opted for the 403(b) ahead of the 457(b) is that Vanguard is available through the former, and I’m a total Vanguard junky. The best option in the 457(b) is TIAA-CREF which is a bit more costly.
Of course, I’ve also been able to take advantage of a SEP-IRA to make additional deductible contributions above and beyond what’s available through the more ‘standard’ options. And in my case, I would rank the SEP-IRA ahead of the 457(b) for the same reason that I prefer the 403(b) — the ability to invest through Vanguard.
With all of that being said, I’d love to hear what you guys think…