Expert: Gina Boykin - 12/11/2007

Question
I am fully vested (and invested) in a company sponsored 401K.  I am 50 years old.  My 401K balance looks like I'm not retiring early (Bal = 300K) so I have 12 to 15 years to retirement.  

I get an annual bonus of 6 to 10K.  I am considering opening an online brokerage account and investing in a few individual stocks.  I have been tracking stocks daily in google and yahoo portfolios for three years.  

Here's the question:  Should I invest in individual stocks, open a separate Roth or make catch up payments to my 401K?  Future value calculators seem to show additional contributions to my 401K will make little difference.  Seems most of the increase in future value will be due to compounding gains.

Regards,
z

Answer
It is more likely that your contributions to the Roth will gain more over 12-15 years than you'll benefit in the current year from your 401K contributions.  The Roth is also better for another reason - a Roth can be considered an emergency fund.  If, for some reason, you need to use some of the money before you actually retire (or if you decide to retire early), you can access your Roth without penalty or taxes.  If you wait until the account has been open for 5 years, and only withdraw your original contributions (not your gains), your withdrawal will be penalty free.

The only advantage to investing outside of a Roth is that you have access to your entire account at any time.  In a Roth, you can invest in stocks, mutual funds, ETFs - the same options as a regular brokerage account.