Open up a Roth IRA. McLemore needs to save money outside of the 401(k). Jenkins suggests a Roth IRA. Contributions are tax-free forever unlike a traditional IRA, in which any distributions are taxed. The maximum annual contribution to a Roth IRA in 2010 is $5,000. Although McLemore’s gross income is $120,000, as a single filer and/or head of household she qualifies for a Roth IRA. Contribution limits are based on modified adjusted gross income (gross income after itemized deductions). Hers is under $105,000, so, she can contribute $416 a month to reach the $5,000 limit. If her modified adjusted gross income was between $105,000 and $120,000 she could only make a partial contribution to a Roth IRA. This will bring her total retirement contributions to $25,100 annually. With all three of these contributions (401(k), company match, and Roth IRA) McLemore should accumulate about $1,441,000 for her retirement in 21 years (at age 60) if she averages a conservatively estimated 8% a year return on her investments.
Eliminate consumer debt. Jenkins recommends that she not make extra payments toward her mortgage. Instead, she should apply $459 toward paying off her car loan at a faster pace. She can use the $2,000 from the financial fitness contest winnings to pay off her student loans. After all of her consumer debt is paid off, she can resume attacking the mortgage loan by making extra payments.