How should I allocate my retirment investments?

My wife and I have about 25 years before we want to retire. We have $55,000 in 401k accounts. We each put 15% of our salaries into 401k. To get full corporate matching, we need to put 5% into 401k. Is putting all 15% into 401k the smart thing to do? With having to pay taxes on 401k withdrawals after retirement, I'm wondering if we are hurting ourselves by putting 15% into a 401k (instead of 5% into 401k, and 10% into other vehicles, or some other allocation). Any recommendations on where we should be invest our 15%, specifically, how much in 401k, IRA, Roth IRA, or other vehicles?

Put at least enough into the 401(k)s to get the maximum company match. Next, "max out" Roth IRAs (assuming your income so permits). After that, go back to the 401(k) and contribute up to the annual max ($15.5K/$20.5K depending on age). If you can still manage to save more, consider muni bonds or "tax-managed" mutual funds.

It depends on your personal preference. I've read that between 2% and 5% is a great contribution rate. And if you decide to reduce your contribution rate, the other 10%, if you can afford which I guess you can, can go into a money market account or high yield savings account. In my opinion, you want that other 10%, or close to it, to be available for emergencies. The bottom line is though, if you can afford, you should make your money work for you. Pay yourself first.

First of all, I would like to commend you and your wife for putting 15% of your salaries in a retirement plan. By all means, always contribute to obtain corporate matching. By the time you retire, you will be among those that will the least to worry about finances at retirement.

Knowing what I do and the opportunities that are available now, I probably would put as much money as I can in a ROTH 401(K). The reason is that you will be having sufficient income at retirement and likely to be in a higher tax bracket than you are now. Second, I believe the tax rates will be raised higher due to the high cost and volume of entitlements on the "boomers".

In most companies where you have choices and company matching, your contributions can be directed to ROTH 401(K) but the company's contributions will be in the 401(K). Withdrawals from ROTH 401(K) will be tax free, but withdrawals from 401(K) are generally taxable as ordinary income. The exception is that company stock in the 401(K) could be taken out (at retirement) and taxes paid (at ordinary income tax rate) on the cost basis of the stock. Later (even only one day) you can cash out the stock and pay taxes on the net appreciated value at the capital gains rate. Of course, the tax laws can change, and will change, during the twenty-five years prior to your designated retirement date and this option is likely not to be available.

You should contribute at least 5% into the ROTH 401(K) in order to get the company matching to the 401(K). You could set up and contribute to a ROTH IRA, but it is subject to income limitation ceilings and may not be an option if you have a company pension. In contrast, you are able to contribute more to the 401(k) and ROTH 401(K) beyond the IRA limitations. Personally, if I have a ROTH 401(K), then I don't feel the need to have a ROTH IRA. What for? That is just one more investment vehicle to track. Also, the administrative fee in the company's 401(K) plans are lower than what you can get on your own IRA's.

If you do not know how to invest or don't want to worry about investing, then I suggest that you opt for a target fund, which are mutual fund investment vehicles that suppose to invest what is appropriate for the investor's age based on the target retirement date (e.g., 2025 fund, 2030 fund, etc.).

Good luck and stick with the 15% contribution to your retirement plans over the next twenty-five years. You and your wife will be very, very glad that you guys planned accordingly.