Author Topic: Roth IRA vs non-match 401k  (Read 4135 times)

Rudema

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Roth IRA vs non-match 401k
« on: November 01, 2015, 11:14:07 AM »
I'm relatively new to investing so I may have no all my facts straight so if I'm wrong, please point me in the right direction.

I currently have a 401k through my work with a 3% match. I contribute up to the match and put the rest of my income into my Roth IRA (VFIFX) through Vanguard.

My wife (24 y/o) does not have any retirement set up as of yet. Her work has a 401k with no matching. They offer Roth 401k and Traditional. She also explains she can get a Roth IRA through Wells Fargo. She is very adamant to start only her 401k or go through Wells Fargo for her Roth IRA. I say we should start an IRA like I have through Vanguard seeing as she does not have any match options through her work.

Who is right here? I have no idea what funds Wells Fargo offer nor their expense ratio.
« Last Edit: November 01, 2015, 11:16:03 AM by Rudema »

JLee

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Re: Roth IRA vs non-match 401k
« Reply #1 on: November 01, 2015, 12:02:12 PM »
The biggest advantage of a 401k is the tax-advantaged limit is far higher than an IRA. If she isn't contributing more than $5500/yr, I would go with an IRA wherever you guys prefer (I like Vanguard).  If possible to do so, maxing both a 401k and IRA will give you a nice tax-advantaged investment.

Generally Traditional is superior to Roth; this is a good read: http://www.gocurrycracker.com/roth-sucks/

MDM

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Re: Roth IRA vs non-match 401k
« Reply #2 on: November 01, 2015, 10:44:51 PM »
See the standard advice below.  Tends to fit (because there are several "if this then that" qualifiers) most situations.  Without knowing more about the information described in http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/ it is difficult to give advice better than "follow these guidelines."

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for some thoughts on "how high is too high?"   

Kroaler

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Re: Roth IRA vs non-match 401k
« Reply #3 on: November 02, 2015, 04:41:51 AM »
The answer by MDM is the "correct" answer.   No need to look further.

DK

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Re: Roth IRA vs non-match 401k
« Reply #4 on: November 02, 2015, 06:18:27 AM »
i second that, good guideline there.

per 5, does anyone know of a good online calculator to determine the tIRA eligibilty? i believe i am in the phase out area, so was just planning on doing the roth out of simplicity.

frugaliknowit

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Re: Roth IRA vs non-match 401k
« Reply #5 on: November 02, 2015, 06:26:28 AM »
In addition to what MDM said, I suggest you and your wife google and read up on "tax diversification".  Basically that's about having different "buckets of money" such that you are not dependent on one particular future outcome (like tax rates remaining the same as they are now). 

boarder42

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Re: Roth IRA vs non-match 401k
« Reply #6 on: November 02, 2015, 07:50:03 AM »
I don't think you need to look into anything passed what MDM said.

Rubic

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Re: Roth IRA vs non-match 401k
« Reply #7 on: November 02, 2015, 08:36:28 AM »
8. Invest in a taxable account with any extra.   

This is the often overlooked step.  OP's spouse is 24 years young.  If she maxes out MDM's 1-7 items and still has some funds to contribute to a taxable account, it will give her a wonderful FI advantage in the years ahead.

Rudema

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Re: Roth IRA vs non-match 401k
« Reply #8 on: November 02, 2015, 09:11:10 AM »
Thank you for the very detailed info, MDM. We're debt free besides the mortgage but our income won't allow us to max the 401k once the Roth IRA's are maxed. But we'll definitely take the path you laid out. Thanks again!

boarder42

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Re: Roth IRA vs non-match 401k
« Reply #9 on: November 03, 2015, 06:19:36 AM »
Thank you for the very detailed info, MDM. We're debt free besides the mortgage but our income won't allow us to max the 401k once the Roth IRA's are maxed. But we'll definitely take the path you laid out. Thanks again!

huh?  this doesnt compute.  the inverse of this could be true but i dont know an income level that wont let you max a 401k.

MDM

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Re: Roth IRA vs non-match 401k
« Reply #10 on: November 03, 2015, 07:20:58 AM »
Quote
...dont know an income level that wont let you max a 401k.
$17K/yr?  Or higher, if one insists on eating. ;)

boarder42

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Re: Roth IRA vs non-match 401k
« Reply #11 on: November 03, 2015, 07:33:00 AM »
Quote
...dont know an income level that wont let you max a 401k.
$17K/yr?  Or higher, if one insists on eating. ;)

oh sorry,  didnt think about that side of it.

Malum Prohibitum

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Re: Roth IRA vs non-match 401k
« Reply #12 on: November 03, 2015, 11:16:39 AM »
oh sorry,  didnt think about that side of it.
  It's all a matter of perspective.

monstermonster

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Re: Roth IRA vs non-match 401k
« Reply #13 on: November 03, 2015, 12:32:39 PM »
oh sorry,  didnt think about that side of it.
  It's all a matter of perspective.

This made me LOL.

Yea, I can't put 17K in my 401K because it's 50% of my net income. Those damn landlords and utility companies insist some of that money goes to them.