Author Topic: max out 401k or open Roth IRA?  (Read 7896 times)

undrtow

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max out 401k or open Roth IRA?
« on: February 02, 2013, 10:19:32 AM »
I'm sorry if this question has been asked before.  If it has, feel free to close this and point me in the right direction.

Anyway, I found this site a few days ago and have been reading as much as time will allow.  I appreciate everyone's insight and advice on the forum, and have been learning a ton.  So currently I have a 401k through my employer and they match 4% if I contribute 5%, which I do.  I am not able to max out my 401k right now but I did increase my contributions this year by a couple percent.  I'm just wondering if instead, should I open a Roth IRA and contribute a couple percent to that and keep my 401k at 5%?  Or should I first focus on maxing out my 401k?

Thanks in advance for the help.

grantmeaname

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Re: max out 401k or open Roth IRA?
« Reply #1 on: February 02, 2013, 11:17:04 AM »
Are your 401k plan options good -- do they look like they have low expenses, and are they passively managed?

icefr

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Re: max out 401k or open Roth IRA?
« Reply #2 on: February 02, 2013, 11:17:41 AM »
What tax bracket are you in now? Does your 401(k) have index funds?

undrtow

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Re: max out 401k or open Roth IRA?
« Reply #3 on: February 02, 2013, 11:39:07 AM »
I'm in the 25% tax bracket and there are several index funds for emerging markets, international stocks, and an S&P 500 index.  I don't see a total market index, but there are also small and large growth indexes, so everything looks accounted for aside from mid-cap.  The fees for each fund vary from 0.02-0.99%, with most being somewhere in the middle, which seems a little high.  I'm not sure if they are actively or passively managed though I think the high fees would imply actively.  When I signed opened my account, I just picked an aggressive approach and they automatically enrolled me in about 9 different funds at varying percentages.  I've seen a 7.88% return in the 2 years I've had it, which is respectable, but I'm wondering if I should maybe try and simply my portfolio into something like 80% total stock market index and 20% bonds, if they'll allow it.

michaelrecycles

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Re: max out 401k or open Roth IRA?
« Reply #4 on: February 02, 2013, 05:31:56 PM »
Since you're in a high tax bracket, you might want to focus on the 401k now for the tax benefit. At a later stage, when you stop working (or work less) and are likely in a lower tax bracket, you can take those funds and do Roth IRA conversions.

destron

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Re: max out 401k or open Roth IRA?
« Reply #5 on: February 02, 2013, 05:51:57 PM »
I've seen a 7.88% return in the 2 years I've had it, which is respectable, but I'm wondering if I should maybe try and simply my portfolio into something like 80% total stock market index and 20% bonds, if they'll allow it.

I hate to be the bearer of bad news, but the S&P 500 has (with some ups and downs) appreciated close to 16% in the last 2 years. Your portfolio is not doing very well.

In regards to your main question -- it depends. Are you getting crushed by taxes? Since you are in the the 25% tax bracket, for every $100 you contribute to your 401k, it costs you $75. Roth IRA, on the other hand, you don't have to pay taxes on when you withdraw. Are you using the standard deduction or itemizing?

The Roth IRA has another advantage --- you can withdraw the money you contribute tax free to use, for instance, as a down-payment for a house. Not bad for a savings account.

I recommend you do a little research and rebalance your portfolio in your 401k to use low-cost index funds.
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undrtow

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Re: max out 401k or open Roth IRA?
« Reply #6 on: February 04, 2013, 12:23:10 AM »
You're right, I do need to (and just did actually) re-balance my portfolio.  My employer doesn't offer a TSM index so I put 80% in an SP 500 index and 20% in a bond index.  They aren't the cheapest funds but I don't have many other options through my employer.  I also bumped my 401k contributions to 10%.  I'm only 28 and am looking at a 30 year retirement timeline so I definitely have time on my side.  I am considering going 100% stocks but haven't decided yet.  I'm thinking I might start a Roth through Vanguard since their fees are pretty minimal, but again, I am unsure if I should start the Roth or max out my 401k first.  Obviously, either one is better than wasting time thinking about it and not acting.

To answer your questions, we use the standard deduction and I was mistaken, we are in the 15% tax bracket.  So maybe starting the Roth would be a good thing to do while we are in a low tax bracket.



« Last Edit: February 04, 2013, 02:17:25 AM by undrtow »

destron

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Re: max out 401k or open Roth IRA?
« Reply #7 on: February 04, 2013, 07:23:54 AM »
I'm thinking I might start a Roth through Vanguard since their fees are pretty minimal, but again, I am unsure if I should start the Roth or max out my 401k first.  Obviously, either one is better than wasting time thinking about it and not acting.

To answer your questions, we use the standard deduction and I was mistaken, we are in the 15% tax bracket.  So maybe starting the Roth would be a good thing to do while we are in a low tax bracket.

In your situation, I would max out the Roth IRA fist considering your tax expenses are very low. I have had a Roth IRA and brokerage account with Vanguard for some time now and I am happy with my choices.
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undrtow

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Re: max out 401k or open Roth IRA?
« Reply #8 on: February 04, 2013, 01:47:59 PM »
Sounds like a plan.  Assuming I have the 5500 to put in a Roth, should I just max out one or put half in mine and half in one for my wife?

sherr

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Re: max out 401k or open Roth IRA?
« Reply #9 on: February 04, 2013, 02:06:28 PM »
Sounds like a plan.  Assuming I have the 5500 to put in a Roth, should I just max out one or put half in mine and half in one for my wife?

It doesn't really make a difference assuming your wife and you stay together. However, in order to put money in an IRA that is in her name she must have at least that much income. If she does, then you can save a total of $11,000 ($5,500 for each of you) in your Roth IRAs. If you can afford it of course.
« Last Edit: February 04, 2013, 02:08:25 PM by sherr »

Crash87

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Re: max out 401k or open Roth IRA?
« Reply #10 on: February 04, 2013, 04:09:20 PM »
There really is no wrong choice here. It boils down to your best guess/preference:

Go with the Roth if you want to potentially withdrawal the money (principle only) before retirement. Your Roth can double as an emergency fund and provide you tax free income when you hit retirement age. This is better tax wise if you retire into a higher tax bracket.

Go with the 401k if you want to avoid some of that 25% marginal tax rate. This option is better tax wise if you will retire into a lower tax bracket.


I plan my contributions to get my taxable income to the top of the 15% tax bracket using my 401k and then switch to roth.
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undrtow

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Re: max out 401k or open Roth IRA?
« Reply #11 on: February 04, 2013, 07:32:15 PM »
Thanks for all the input guys.  I think I'm gonna open a Roth through Vanguard and work on maxing that out.  Then I'll start working on one for my wife, who also works.  I like the idea of taking advantage of our low tax bracket while we can.  My 401k is 80/20 stocks/bonds, but I'm thinking I'll be a little more aggressive with the Roth. 

DK

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Re: max out 401k or open Roth IRA?
« Reply #12 on: February 06, 2013, 08:55:26 PM »
Personally what I do is:

1 - Contribute amount to get full employer match in 401k. Free instant 100% returns. Nice.
2 - Calculate out what my taxable income for the year will be.
3 - Contribute amount to tax deductible (401k) account to put me in 15% tax bracket (~35K) for taxable income.
4 - Contribute amount to taxable (roth) account with leftover investment money.

Basically don't allow yourself to get taxed over 15% while you can. Having a mix at retirement between taxable and non-taxable gives you a lot of leverage and control over how much you will get taxed regardless of any tax bracket changes.