Vanguard leaders explore best practices for saving


Young people just starting to save for retirement often deliberate about where to put their retirement savings. Vanguard retirement investment strategist Maria Bruno and Certified Financial Planner™ professional Kahlilah Dowe explain the merits of first capturing employer-matched contributions in a 401(k) plan and then turning to a Roth IRA, depending upon the saver’s tax bracket.

Notes:
  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
  • For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
  • Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.  


TRANSCRIPT

Amy Chain: Let’s take a question from Mamie. Mamie is a young person watching this evening. Mamie, thank you for being engaged in your investing. She’s 25 years old and saving for retirement. And she says people have told her that she should first max out her employer-matched contributions and then max out her Roth IRA if she can. Is that the right order of priority or should the Roth IRA come before the 401(k)? So, yes, great job saving. Tell your friends, save, save, save.

Kahlilah Dowe:
Right, we’re smiling.

Amy Chain: And then how do we think about the priority of where to save first?

Kahlilah Dowe: Yes, that’s a good question. We never want to leave money on the table. So I like the idea of getting the full employer match first. And then when you think about where you put additional dollars, that I think comes down to more of your current tax bracket. And some investors who are clearly in a very high tax bracket will benefit from putting more into the traditional 401(k), and some investors who are kind of, let’s say, on the cusp, maybe not in a very high tax bracket, certainly those who are in a lower tax bracket, will use more of the Roth IRA. But we don’t want to leave the employer contribution on the table, so I think she’s on the right path with that.

Amy Chain: And some 401(k)s offer a Roth option as well, correct? So maybe Mamie should check with her employer to see if there’s a Roth option within her 401(k) to diversify that future tax impact.

Maria Bruno: For Mamie in her profile, I actually really like the approach that she’s taking in terms of she’s contributing to the 401(k), capturing the match, but then saving in the Roth IRA because it gives the flexibility, for some of the reasons that we had talked about earlier, and then extra savings should go back into the 401(k). So I really like that approach.

Important information All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing. This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation. Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made). Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor. © 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.