At the time of this writing, as the old saying goes, some could say it is the worst of times. However, for those who are planning for the long term, this is an excellent time to put money aside, as over time, the problems seen today will subside, and the financial markets over the long term have a way of balancing gains and losses. This being said, this paper will focus on the planning of a 401K over the long term for the best possible outcome. What is the Best Choice and Why
In the case of the researcher, and indeed for other investors who do not have unlimited funds to invest and are looking toward the long term, within a 401K account, the best investment strategy is to first make contributions under the Traditional IRA rules, up to the limit of $5,000 annually, and then to make Roth IRA contributions. The reason for this is that the Traditional IRA contributions, again up to $5,000, is tax deductible today, providing present day financial benefit as well as the security of retirement income years later.
The numbers show this; for example, the maximum $5,000 Traditional IRA contribution, each year for the next 20 years, will on average provide almost 5% more funds for retirement than the Roth option (Money Chimp IRA Calculator, 2009). It must also be understood, however, that over the $5,000 limit annually, the Roth will provide tax savings upon retirement, and in this way, tax savings can be maximized no matter what.
Money Chimp IRA Calculator (2009). Retrieved March 6, 2009 from the World Wide Web: www. moneychimp. com