Author Topic: 401k Roth IRA, or a little of both?  (Read 3503 times)

astvilla

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401k Roth IRA, or a little of both?
« on: October 23, 2014, 10:01:40 AM »
Still a newbie, only worked 1 month, not sure what to do w/my money, got questions on some differences and trying to weigh pros and cons, correct me if i'm saying something wrong please, it's just my understanding after some research
401k
Pros: before tax, matching (which i'm not caring about for the moment in my situation, depends on how long stay w/employer, i don't intend to stay that long but who knows)
Cons: can't touch it till i'm 59.5 y.o right? also only options are funds. would like to put money into vanguard index fund but otherwise the other choices seem pretty bad. right now just deposited my 1st dollars into money market for now (not sure when stocks will correct this year or next?? or am i wrong to think that)

Roth IRA
Pros: no tax on earnings, no penalty if i withdraw to pay for 1st house, more options and not limited to funds so more flexibility
Cons: money comes from after tax take home pay, not provided by employer? can withdraw early with less penalty?

Ideally I would like to move out and purchase a home but if i put money into a 401k, that kind of imprisons the money and can't use for down payment. my thinking now is to balance between the 2, focusing more money for roth and putting maybe 20-30% to 401k for just tax reasons. (20-30% because i don't make enough to be limited?) im not considering employer match because i don't plan to stay 5 years but it could happen, don't know the future but 90% chance not staying that long. i also checked how much i save by contributing 40% to 401k and it's about $70/week. but half is in the 401k that i can't touch.

also where should i open a roth ira account? fidelity? my local bank? or are they all the same and what are things i need to look for? i just opened 1 in fidelity but got no idea what to do with it. can i invest in index funds in roth ira?

not sure if polite to ask but also what are good individual company stock with 5% dividend and high trailing earnings? what is a trailing earning anyways?

thoughts, suggestions? i'm not moving out now but want to save up for later, also home prices are crazy high in my area. i'm so shocked people can get homes for only $100k or less. that money would buy 1 room in the dangerous cities in my state and in the country. and apologies for newbie questions but personal finance just seems way too overcomplicated than it needs to be.

TN_Steve

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Re: 401k Roth IRA, or a little of both?
« Reply #1 on: October 23, 2014, 01:36:25 PM »
I'm not the best one to answer this, probably, but am going to, in part to kick you back up to the top.  :-)

I'm guessing you are in early/mid 20s? No student loans or other debts??   

For the options you present, plow it into both the 401k and a Roth IRA (and, do you have a ROTH 401k option at work???).  Assuming that you are in the lowest tax bracket of your working life, now is the time to take full advantage of Roth options and reap the benefits of decades of compounding.  If you look around this site, and the "boglehead" site, you'll find ways to access 401k monies before 59.5, but that is long range stuff.

I would recommend against pulling funds out of retirement accounts or IRAs for a house.  Leave them in place and peer in occasionally to watch those dollars reproduce.  :-)

Fidelity?  I don't know anything personally about them; Vanguard is generally a good choice for cheap and easy.  Any fees on the IRA at fidelity?  Access to vanguard or similar etfs?  What are the commission charges, if any?  (You can put roth $$ into ETFs, mutual funds, stocks, bonds, etc.  It is just a wrapper for an investment account.)

Regarding individual investments.  Don't go beyond broad based index funds until AT LEAST, you don't need to ask for guidance.  Example:  Most hedge funds don't beat the market.  Most mutual funds don't beat the market.  No broker available to a newbie investor beats the market.  etc. etc.  An individual can do well, even today, but you need to figure it out and find your niche--and realize that the odds are against you.  Example of my eldest, who is in mid-20s.  Math geek engineer with econ minor who thought he'd figured out some high octane strategies....  Luckily, he learned a cheap lesson as he didn't have much to invest at that time.  Now he has Vanguard index selections in both his Roth IRA and his 401k.

Good luck, and hopefully some younger folks can chime in here. 

astvilla

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Re: 401k Roth IRA, or a little of both?
« Reply #2 on: October 24, 2014, 05:47:40 PM »
yes i have no debt or loans and early/mid 20s. the roth i'll probably max out or very close to it.

There is a vanguard index fund available to me on 401k.

Thanks for clarifying the Roth IRA, TN_Steve.

Are there ANY negatives to a Roth IRA? It's just overwhelmingly positive, there have to be some disadvantages of it no?

Cheddar Stacker

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Re: 401k Roth IRA, or a little of both?
« Reply #3 on: October 24, 2014, 06:53:48 PM »
The disadvantage to the roth ira is you don't get a tax deduction. If you make >$50k you will likely want to use the 401k, or a traditional ira to reduce your taxable income down into the 15% bracket which is around $37k. You have $10k tax free space with standard deduction and exemption.

If you need the money for a house, don't put it in a tax deferred account, put it in a taxable brokerage account.

If you do the 401k just put 100% in the vanguard index and diversify elsewhere.

TN_Steve

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Re: 401k Roth IRA, or a little of both?
« Reply #4 on: October 24, 2014, 08:31:20 PM »
+1 to Cheddar Stacker.

It is a question of marginal rate now versus in retirement.  Again, I'll compare DW/Me to our eldest.  He is in California's second highest bracket (easy to do in silicon valley), and (I think?) 25 or 28% fed.  I think he is marginal on Roth, but he goes that route, as he lives a pretty hardcore mustache lifestyle.  DW and I are old farts (for this forum) and at highest fed bracket with all the joyous add-ons.  No way do we do Roth, as we will retire earlyish (late for here though!) and be very Fancy Pants on a far smaller marginal rate.

The big-time number crunchers in this area are starting to postulate that it is still worth it to Roth if you have a long horizon and anticipate that your retirement rate will be slightly higher than the working rate...

In your case, looking long term, you probably should be Rothing as much as possible, as long as you can meet both the taxes on the Roth contributions and the competing demands for your money (such as house).


windypig

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Re: 401k Roth IRA, or a little of both?
« Reply #5 on: October 24, 2014, 08:41:26 PM »
If you intend to use the money in the next 2 years (sounds like you want to buy a house/condo?) I wouldnt invest it all except in CDs or a savings account.

johnny847

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Re: 401k Roth IRA, or a little of both?
« Reply #6 on: October 24, 2014, 08:43:39 PM »
It is possible to take money out of a 401k without penalty or extenuating circumstances. Look up the 72(t) or SEPP (substantially equal periodic payments). It provides you three ways to calculate your allowed withdrawals. However, once you initiate a SEPP, you must continue it for at least 5 years or until 59.5, which is last. Also, you must take out the money under a SEPP every year - no more no less.  If you fail to make the required withdrawal, you will face a penalty on all the money withdrawn so far. Hence, it is incredibly rigid. Also, if none of the three methods of calculating the withdrawals for a SEPP fit how much money you want to take out, you're out of luck.

So it isn't flexible, but it does exist. Many people don't know about it, and this fact does alleviate some fears of locking up your money for some people.