Suzie should use the priority of money to solve this problem.

First, she should take advantage of free money.

Suzie has the option of saving up to 3 percent of her salary, or $1,500 per year, that her company will match with 50 percent of that amount, or $750.

Note that this money is tax deferred, or money that has not been taxed yet. The maximum contribution for 2010 in a 401(k) account is $16,500. Since Suzie’s first priority of money is free money, she should first invest $1,500 in her 401(k) plan. Note that Suzie also saves on taxes when she invests in her 401(k) plan because investments in her 401(k) reduce her adjusted gross income because these investments are tax deferred.

Second, Suzie should capitalize on tax-eliminated money.

A Roth IRA, more investments in her 401(k), or a traditional IRA are all good options, but because she believes her taxes will be higher in the future, she should choose the Roth IRA. A Roth IRA not only offers total elimination of future taxes; it also has the additional benefit of allowing her to withdraw the principal without incurring a penalty or taxes because the money has already been taxed. Suzie can invest up to $4,000 per person in a Roth IRA or traditional IRA in 2010. If Suzie invests $1,500 in her 401(k) plan and $4,000 for herself in a Roth IRA, she still has $4,500 remaining.

Third, Suzie should take advantage of tax-deferred money.

Suzie could invest the remaining $4,500 in her 401(k), even though there is no additional match. Remember, her goal was to invest $10,000 for retirement.

Based on the “Priority of Money”, Suzy should invest the following in each vehicle:

• Free money 1,500 401k For the company match
• Tax-advantaged 4,000 Roth For the elimination of future taxes
• Tax-advantaged 4,500 401(k) For tax deferral
• Total 10,000 Total amount Suzie saved

c. In addition, Suzie received the following:

1. Invested $10,000 of her own money.
2. Got a free $750 match from her company.
3. Saved $2,220 on next year’s taxes. (This is her 37% marginal tax rate (her 30 percent federal marginal tax rate and her 7 percent state tax rate) times the $6,000 she invested in her 401(k) plan. The total amount Suzie saved, including the match and tax savings, adds up to $12,970.