ASK KIM
Where to Put Your Retirement Money
by Kimberly Lankford

I am 25 years old and would like to know which account I should max out first -- my 401(k) with a 3% match or an IRA, or should it be a balanced approach?

It would be great if you could max out both your 401(k) contributions and your IRA. Since you're starting so young, that money can grow significantly by the time you retire -- giving you an amazing head start before you have a slew of other financial obligations that make it tougher to save, such as a house and a family.

But since you're so young, you may not have enough income yet to save the maximum and still be able to pay your bills. In that case, start by at least investing enough in your 401(k) to receive the employer's full match. That's a 100% return that you won't find anywhere else. Even if your employer only matches 50 cents for every dollar, it's still impossible to top an investment that guarantees a 50% return.

And since your 401(k) contributions are subtracted before taxes are calculated on your income, they lower your tax bill and don't affect your take-home pay nearly as much as you'd expect. If you get paid $5,000 per month and contribute $500 to your 401(k), for example, it will only lower your take-home pay by $375 – not the full $500 – if you're in the 25% tax bracket. If your employer matches up to 3% of your pay, you'll get an extra $150. That means you'll end up contributing $650 to your 401(k) while only lowering your paycheck by $375.

After you've invested enough in your 401(k) to get the employer match, then invest up to the maximum $3,000 in a Roth IRA. You can't deduct Roth contributions from your income taxes, but you'll be able to withdraw your principal and earnings tax-free after age 59½. You can withdraw your contributions at any time without a tax bill. (If you touch the earnings too early, though, you'll have to pay income taxes and penalites.)

If you still have any money left over after contributing up to the match for your 401(k) and the $3,000 to a Roth IRA, then contribute more money to the 401(k). Even beyond the employer match, the pretax contributions – and tax-deferred growth – will still improve your tax situation. And if you earn too much money to contribute to a Roth IRA, then invest up to the maximum in your 401(k) before investing in a nondeductible IRA or a taxable account earmarked for retirement. You can only contribute to a Roth if your adjusted gross income is less than $110,000 if you're single ($160,000 if you're married). The contribution limits start to phase out at $95,000 for singles; $150,000 for married couples.

For investing ideas, see our sample mutual fund portfolio for long-term financial goals.