Author Topic: 401 K vs. Roth IRA  (Read 2917 times)

bpc887

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401 K vs. Roth IRA
« on: February 16, 2014, 07:59:15 AM »
Hello

Does it make more sense to invest money through a 401K into and S&P500 index fund with 0.40% Fee or invest post tax income into a Roth IRA Vanguard S&P500 index fund with 0.10% fee. 

Assume I do not want to make a withdrawl from either for the next ten years. 

Thank you for helping me!

Sincerely
BPC

frugally

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Re: 401 K vs. Roth IRA
« Reply #1 on: February 16, 2014, 08:42:23 AM »
What will your tax rate be now versus when you take the money out?

GlassStash

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Re: 401 K vs. Roth IRA
« Reply #2 on: February 16, 2014, 09:52:02 AM »
In addition to tax rates, the choice also depends on what you want to do with the money. How much access do you need in 10 years? Are you more comfortable with a 72(t) or Roth conversion ladder? Do you prefer the flexibility of withdrawing Roth IRA contributions as needed?
« Last Edit: February 16, 2014, 09:54:07 AM by GlassStache »

Zaga

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Re: 401 K vs. Roth IRA
« Reply #3 on: February 16, 2014, 12:33:42 PM »
We have a similar, but more extreme, situation.  Here's ours and how we decided, maybe that will help you think it through.

We each have a 401-K, mine has some very low cost index funds but sadly his is all American Funds with the lowest ER above 1%.  In addition to that we are in the 25% tax bracket (assuming employment stays the same as last year).

The thought it, which is better?  Take the tax deduction now but pay the outrageous fee for American Funds, or skip the tax deduction and do investing just in my 401-K and Roth's.

Taxes now, we are paying 25% for each dollar that doesn't go into the 401-K.  That's pretty significant.  Even taking into account the 1.41% ER for the fund we chose in American Funds (ugh), the likelihood that we will be in the 15% tax bracket in retirement, and the fact that DH is a contractor and so not likely to be in this job for many years, it would take something around 7 years before the expense ratio negated the tax advantages we have right now.  There's no way he'll be in that job for 7 years, so we're maxing out his 401-K.

Now, if we were just in the 15% tax bracket, the answer would be different.  That's what we figure the line is between benefiting more from the Roth or from the 401-K.  For us personally, obviously every situation is different.

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Now, your case is not as bad as ours.  Your 401-K has an index fund.  It may not be the best one ever, but it is certainly not the worst!  I would not be deterred from 401-K investing in your case, unless you have other reasons for investing in Roth's instead.

wtjbatman

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Re: 401 K vs. Roth IRA
« Reply #4 on: February 16, 2014, 09:00:49 PM »
Maybe a stupid question, but can you do both? Besides all of the above points people made (there are some good ones), you can only invest $5500 a year into an IRA. I know that's a lot of money to some people, but you may be able to sock away more than that. Can you max out that IRA while putting money into your 401k as well? That .40 expense ratio fund in your 401k isn't perfect, but like Zaga pointed out, I've seen much worse. Also keep in mind that fund only covers the S&P 500, and while it contains some very strong and mature companies, it doesn't have the same diversification as a total stock market fund.

Zaga

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Re: 401 K vs. Roth IRA
« Reply #5 on: February 17, 2014, 02:45:59 PM »
Maybe a stupid question, but can you do both? Besides all of the above points people made (there are some good ones), you can only invest $5500 a year into an IRA. I know that's a lot of money to some people, but you may be able to sock away more than that. Can you max out that IRA while putting money into your 401k as well? That .40 expense ratio fund in your 401k isn't perfect, but like Zaga pointed out, I've seen much worse. Also keep in mind that fund only covers the S&P 500, and while it contains some very strong and mature companies, it doesn't have the same diversification as a total stock market fund.
Good call, if you can max out the 401-K and have enough for a Roth, do both!  Sadly we can't yet do that, this will be our very first year maxing out our 401-K's.  Maybe once our final loan is paid off in a few years (it's a monster) we will be able to do both.