A Roth IRA or Just Investing for early retirement?

[carozy]

I have a 401k at my work with a few thousand in it.  Soon I'll be out of debt (next month, yay!) and after I save up my long term emergency fund, I want to start investing.  There is one basic thing that I am a little confused about: Roth IRA, just invest, or do both.  I'm not sure what's best in my situation.

I'm planning on getting my savings rate as high as I can once I move out and hope to retire in 10-15 years, well before I'm age 59 1/2, the age I could take out money from a Roth IRA without penalties.

My income is only $38,500 and I live in the SF Bay Area.  Right now my expenses do not include rent since I'm living with my parents temporarily.

Let's say when I move out I'm able to invest $1300-$1400 per month.  Would that be enough for me to invest in both a Roth IRA and separate individual investing so I could retire early?  Should I max out the Roth IRA? Or would it be better to just invest without the Roth so more of the money could go toward the early retirement?

Just to be clear, I don't have a Roth IRA right now, just the 401k from work (which includes a little employer contribution).  I haven't adjusted the percentages of what goes in there, so it's the standard, since I've been in debt and wanted most of my money to pay off debt.  I've worked there about 3-4 years so I'm vested now.

Just not sure how I should go about it once I've got the money to invest in November (when I'll likely move out with emergency fund).

Any thoughts?  Thanks.

[matchewed]

So it sounds like you're kind of in the beginning stages. We'll break some of this up.

You're allowed to invest up to $5500 in an IRA annually (Roth or Traditional it doesn't matter it is one big IRA cap so if you have two IRA's you can do a combined total of $5500).

So if you anticipate being able to save $1300/month that would be a total of $15,600 annually. So you can do both. I would if I were in your shoes sit down and really think about maxing your 401k prior to other investing but having different tax treated accounts is useful for anyone. I'll just leave you with the standard links -
http://jlcollinsnh.com/stock-series/
http://www.madfientist.com/retire-even-earlier/
http://www.bogleheads.org/wiki/Investment_Policy_Statement

[carozy]

Thanks for the info and the links.  I've read some of the jlcollins one before and really found it helpful.  I'll reread it and check out the others.

[Chrissy]

You can take the principal out of a ROTH anytime without taxes or penalties.  If you maxed it out for the next 15 years, then, at the end of that time, you'd have access to $82,500.

[carozy]

I didn't realize that.  Thanks.

[TomTX]

I didn't realize that.  Thanks.

And then you can "Roth Pipeline" the 401(k) money for access via the Roth.

[MDM]

To know the correct answer, you need to predict correctly two things:
1)  Your annual income after retirement
2)  How that income will be taxed (federal, state, and local)

As you can't know enough of the above to be certain, take your best guess, invest accordingly, and then don't worry about it (other than checking for tax law changes every year or so).  In addition to the links already mentioned, see http://www.bogleheads.org/forum/viewtopic.php?f=10&t=141909 and http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758, and links therein, for more details on Roth vs. Traditional IRAs/401ks.

From a tax minimization standpoint, assuming no change to current tax codes, the "best" approach is pay no tax now (traditional 401k and IRA if your income is high now, Roth if it is low), and no tax later (e.g., converting traditional at 0% to Roth, or just staying in Roth if that is where you started).  But it takes a specific set of circumstances to manage that.  You may be "unfortunate" enough to have income that prevents that approach.

And I agree wholeheartedly with matchewed's "maximize your 401k first" advice.

[irishQ]

Penalties on Earnings from Contributions

Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution. Be very careful NOT to confuse the early withdrawal penalty with the taxes imposed on a non-qualified distribution (discussed in Part III). A non-qualified distribution imposes an ordinary income tax on the distribution, but the early withdrawal penalty will be imposed in addition to that tax.


http://www.fool.com/money/allaboutiras/allaboutiras07.htm

[frugaliknowit]

In my opinion and those of Suze Orman, you should:

1.  Contribute to the 401K to maximize the match.
2.  Then, if possible, max out the Roth.

In your case, you still have debt, so to be optimal, you might forgo the Roth until you are debt free and have an appropriate emergency fund.  Arguably, the Roth can be used as an emergency fund until you have more assets built up (if you do this, you should have the Roth invested in low risk, highly liquid funds until you have more assets).

[Chrissy]

Penalties on Earnings from Contributions

Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution. Be very careful NOT to confuse the early withdrawal penalty with the taxes imposed on a non-qualified distribution (discussed in Part III). A non-qualified distribution imposes an ordinary income tax on the distribution, but the early withdrawal penalty will be imposed in addition to that tax.

Just to be clear, contributions and earnings are different.  "You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you'll be penalized for withdrawing any investment earnings before age 59 ½, unless it's for a qualifying reason."

Source:  http://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index5.htm

[carozy]

Wow, thanks for all the replies.  Very helpful info.  I have some reading to do!

After I am out of debt next month, I'll see about maximizing my contribution to the 401k at work.  The only other reason I haven't done it (besides being in debt) is because the 401k is managed mutual funds, no Vanguard or Fidelity-type choice.  My company was also recently bought, so I want to make sure there is still the company match going on.  (They took away our roll-over vacation/sick days so I'll have to look into the 401k match also.)  If there is no longer the company match, would that change people's ideas about maximizing that particular 401k?  Or would it be better to just go Roth with a Vanguard and individual investing in that case?

Thanks again for the helpful responses.

[carozy]

I didn't realize that.  Thanks.

And then you can "Roth Pipeline" the 401(k) money for access via the Roth.

"Roth Pipeline" ~ do you mean convert the 401(k) to a Roth?

[frugal_engineer]

While we have some Roth people interested in this thread I have a question:

When you've withdrawn contributions from your Roth (say for a house down payment), do you get to then put all that money back in?  Or have you forever lost those contributions and are still limited to $5500 per year?

[matchewed]

Wow, thanks for all the replies.  Very helpful info.  I have some reading to do!

After I am out of debt next month, I'll see about maximizing my contribution to the 401k at work.  The only other reason I haven't done it (besides being in debt) is because the 401k is managed mutual funds, no Vanguard or Fidelity-type choice.  My company was also recently bought, so I want to make sure there is still the company match going on.  (They took away our roll-over vacation/sick days so I'll have to look into the 401k match also.)  If there is no longer the company match, would that change people's ideas about maximizing that particular 401k?  Or would it be better to just go Roth with a Vanguard and individual investing in that case?

Thanks again for the helpful responses.

It depends on your particular circumstances. You'd have to run some numbers on the taxes and the savings first. I do have to say that you can try to lobby your HR department for better 401k choices. Get your fellow employees involved and pitch for what you want to see in your 401k. Can't hurt to ask and ask and ask...

[Cromacster]

While we have some Roth people interested in this thread I have a question:

When you've withdrawn contributions from your Roth (say for a house down payment), do you get to then put all that money back in?  Or have you forever lost those contributions and are still limited to $5500 per year?

Short answer, no those contributions are gone forever.

There is a grace period, I think 60 days.  But chances are if you are withdrawing money for a house, you won't be able to make that amount of money to put back in within 60 days.  Which is really why money in a roth should stay in the roth. 

[lackofstache]

If the 401(k) has no match, I'd go for the Roth & then individual investments through Vanguard or in 401(K). Once the EF is fully funded and you're comfy with it, I'd go 401(K) up to match>Roth maxed out>401(K) maxed out (if low enough fees to be beneficial)>Outside investments

[carozy]

If the 401(k) has no match, I'd go for the Roth & then individual investments through Vanguard or in 401(K). Once the EF is fully funded and you're comfy with it, I'd go 401(K) up to match>Roth maxed out>401(K) maxed out (if low enough fees to be beneficial)>Outside investments

Thanks, that is along the lines of what I am thinking.  So my company matches 50% up to 6% contribution, so I would contribute 6% to my 401(k), then I max out a Roth ($5500), and because the 401(k) has fees/is not Vanguard/Fidelity, I would use whatever I have left to just invest.  (In the mean time try to get my company to let me do Vanguard.)

Thanks everyone again, your responses are very helpful.