Author Topic: Max 401k or tIRA first?  (Read 1754 times)

GetItRight

  • Pencil Stache
  • ****
  • Posts: 629
Max 401k or tIRA first?
« on: January 01, 2017, 04:40:11 PM »
I'm currently contributing 6% to a 401k for a 5% match. $68k in a 401k, plus $7k outstanding 401k loan I used to refi student loans and $66k in other student loans at 4%. I'm sick of the government stealing so much from me in taxes and ran some numbers on what it would cost me to max my 401k... Only another $88/wk to contribute another $130/wk so far as net pay goes, and the government would steal $2200 less per year from me. The net pay reduction would hardly be noticeable for me but would be a moral and ethical win with the reduced government funding. Then I got to thinking about opening an IRA and getting things rolling for the Roth ladder if I end up being able to ER. Would it make more sense to leave my 401k where it is to get the match and first max my tIRA contributions so I start building something to convert?

I'm not 100% on how IRAs and the Roth ladder works but I think I have a decent idea from http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/. It sounds like fund your tIRA however you like and convert whatever amount you want in any year but pay tax on it as regular income during years you convert, then withdraw the converted money tax free after it has been in the Roth for at least 5 years. Anything I'm missing? I assume Vanguard would be the place to open an IRA?

So, max 401k or tIRA first? I think my student loans are at a low enough interest rate now at 4% (higher was over 16% a few years ago) that I can consider funding tax advantaged accounts to reduce what the government steals and be better off over the long term. Off the top of my head now that I've seen the net pay numbers it shouldn't have a huge affect on time to repay the student loans.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4815
  • Age: 34
  • Location: Seattle, WA
Re: Max 401k or tIRA first?
« Reply #1 on: January 01, 2017, 04:53:50 PM »
Doesn't matter, as long as you have reasonable funds available in your 401(k). You can roll your 401(k) over to an IRA after you retire to get the Roth ladder going.

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Max 401k or tIRA first?
« Reply #2 on: January 01, 2017, 05:00:22 PM »
Personally, I've always had kind of crappy investment choices in 401ks.  And every place I worked tended to swap out investment options every 2-3 years (so that even if you found a good set of options, they'd eventually go away.)  And generally, a lot of 401k plans have pretty high administrative costs.  Yours may be awesome and offer a wide range of low cost investments. 

But because my experience hasn't always been grand, my bias is to fill the 401k up to the point you get a match and then invest in traditional.  There are some edge cases where Roth even makes more sense. (For example, if you might be paying more in taxes in the later years of your retirement).

GetItRight

  • Pencil Stache
  • ****
  • Posts: 629
Re: Max 401k or tIRA first?
« Reply #3 on: January 01, 2017, 05:33:43 PM »
Interesting, can I move my entire 401k with the company into an IRA upon retirement or if/when I leave the company for any reason? Although I don't want to stay in the state I live in for my whole career, there have been ups and down but overall it's a good company and I think they've treated me well enough thus far. The future is uncertain, but there is a chance I could go until FIRE with this company and tolerate living here for a couple decades. For what it's worth my 401k is in a Vanguard target retirement fund, there are much worse possibilities.

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Max 401k or tIRA first?
« Reply #4 on: January 01, 2017, 05:58:17 PM »
Interesting, can I move my entire 401k with the company into an IRA upon retirement or if/when I leave the company for any reason?

I am going to assume the answer to that is "yes", but I might very well be wrong.  I have always been able to roll 401ks into tIRAs with zero problems.  Usually you are offered the choice of (1) leave it here forever, (2) roll it into your next company's 401k (if they'll allow it) or (3) roll it into traditional IRA.

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1056
Re: Max 401k or tIRA first?
« Reply #5 on: January 02, 2017, 09:06:19 AM »
We fill the HSA first, then trad 401k before IRAs.  For us, HSA  and traditional 401k decrease our AGI AND line 7 wage income, which increases our refundable credits (EITC, also matched by our state at 30%).  Trad IRA contributions can't reduce line 7 wage income, so won't increase EITC.

Of course, at that point we hit zero fed tax, so there's no point to additional traditional contributions.  The tax refunds then go to maxing Roth IRAs for each of us.

If you are income eligible, could you contribute to BOTH an IRA and 401k?

JLee

  • Walrus Stache
  • *******
  • Posts: 5498
Re: Max 401k or tIRA first?
« Reply #6 on: January 02, 2017, 10:06:37 AM »
Interesting, can I move my entire 401k with the company into an IRA upon retirement or if/when I leave the company for any reason? Although I don't want to stay in the state I live in for my whole career, there have been ups and down but overall it's a good company and I think they've treated me well enough thus far. The future is uncertain, but there is a chance I could go until FIRE with this company and tolerate living here for a couple decades. For what it's worth my 401k is in a Vanguard target retirement fund, there are much worse possibilities.
Yes.