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Extra Funds--Remodel or Retirement?


"I have been contributing 10% of my salary to our company 401k program for several years but with the down-turn in the economy in 2008, the company match was reduced to $.25 per dollar, up to 6% of contributions.  I have been considering reducing my 401k contributions to 6% and using the remaining 4% to either:

A) Start a Roth IRA or

B) Finish the remodeling of our primary residence which was started in 2009 and will need approximately $10,000 to complete.

What are your thoughts on which would be the better long term approach?"

Thank you for your question.  I obviously know very little about your personal situation regarding your savings but I am going to answer your question with just the info you provided. Based on the information I wrote about in a my "How Much Should I Save?" post, you should be saving at least 10% for retirement.  I like your idea of sticking with the 6% in your 401(k) in order to receive your employer match and moving the other 4% to a Roth IRA.  Just make sure you have the discipline to do this.  One of the benefits of the 401(k) is that it is debited automatically so you never touch the money and can’t spend it.  The choice of Roth IRA or 401k depends mostly on what tax bracket you are in today.  If you are in a high tax bracket, it may make more sense to continue those contributions in your 401k as opposed to the Roth IRA.  

As far as the remodeling, this is just like any other thing you may want: new computer, stereo, sports tickets, new car, whatever.  Prioritize what is important to you and buy it with the money you save–just don’t sacrifice the importance of retirement planning for such things.  As you can see in the aforementioned post, you will have to set aside a lot more money in the future to make up for not doing it when you were younger.