Author Topic: Difference between 401k and Traditional IRA  (Read 4058 times)

MVal

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Difference between 401k and Traditional IRA
« on: June 03, 2015, 10:11:57 PM »
Okay, so I have a 401K at work (I invest only up to the employer match) and I have my own Roth IRA outside of work, and I've heard from several people today that maxing out the 401K would be better than trying to invest in taxable Vanguard accounts after maxing out the Roth. But what about a regular IRA? Is there any advantage between a traditional IRA and a 401k? They are both pre-tax contributions, so what's the difference?

Gin1984

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Re: Difference between 401k and Traditional IRA
« Reply #1 on: June 03, 2015, 10:23:49 PM »
You can't max out both a Roth and a traditional IRA. 

MDM

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Re: Difference between 401k and Traditional IRA
« Reply #2 on: June 03, 2015, 10:32:00 PM »
Is there any advantage between a traditional IRA and a 401k?
In an IRA, you can choose pretty much any investment in the world, for as low a fee as you can get.  In a 401k you are limited to the funds offered through your employer, often with higher fees than you pay in an IRA.

Quote
They are both pre-tax contributions, so what's the difference?
Besides the ones above in this post and Gin1984's, the contribution limits are lower for the IRA than the 401k.  E.g., $5.5K and $18K respectively if you are under 50 years old.

Tjat

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Re: Difference between 401k and Traditional IRA
« Reply #3 on: June 04, 2015, 06:42:48 AM »
Keep in mind that depending on income, you likely won't be able to deduct contributions to a traditional IRA if you are participating in a 401k plan through your employer. However, folks are right in that IRAs offer more flexibile investment choices and can be worth it if you 401k offers bad investments and/or high fees.

kpd905

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Re: Difference between 401k and Traditional IRA
« Reply #4 on: June 04, 2015, 07:00:54 AM »
If you are at a higher tax rate now than you think you'll be in retirement, and your income allows you to deduct traditional IRA contributions, I'd go with traditional IRA.

If your income is too high to deduct, then go Roth IRA.

sisto

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Re: Difference between 401k and Traditional IRA
« Reply #5 on: June 04, 2015, 08:58:29 AM »
The Mad Fientist has a great article that should help you.

http://www.madfientist.com/retire-even-earlier/

Merdox

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Re: Difference between 401k and Traditional IRA
« Reply #6 on: June 04, 2015, 09:04:05 AM »
I'll piggy back off this for a basic question: can you have both a Roth and an employer 401k? I have a Roth with Vanguard and my employer will be implementing a 401k soon, but for some reason I thought you couldn't have both and was worries I'd have to end the Roth. That's incorrect, correct?

Tjat

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Re: Difference between 401k and Traditional IRA
« Reply #7 on: June 04, 2015, 09:13:55 AM »
I'll piggy back off this for a basic question: can you have both a Roth and an employer 401k? I have a Roth with Vanguard and my employer will be implementing a 401k soon, but for some reason I thought you couldn't have both and was worries I'd have to end the Roth. That's incorrect, correct?

You can have both a Roth IRA and a 401K (of any type). The only real restrictions on who can participate in a roth are income based, in which case you can contribute to a traditional IRA and rollover to a roth (instantly, so to avoid taxes on gains).


Merdox

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Re: Difference between 401k and Traditional IRA
« Reply #8 on: June 04, 2015, 09:15:59 AM »
I'll piggy back off this for a basic question: can you have both a Roth and an employer 401k? I have a Roth with Vanguard and my employer will be implementing a 401k soon, but for some reason I thought you couldn't have both and was worries I'd have to end the Roth. That's incorrect, correct?

You can have both a Roth IRA and a 401K (of any type). The only real restrictions on who can participate in a roth are income based, in which case you can contribute to a traditional IRA and rollover to a roth (instantly, so to avoid taxes on gains).

Thanks very much. My income is now 125K which I believe is the transitioning out range. Assuming is stays at 125K, can I continue with the Roth as is and max out the 401k?

MDM

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Re: Difference between 401k and Traditional IRA
« Reply #9 on: June 04, 2015, 12:38:33 PM »
My income is now 125K which I believe is the transitioning out range. Assuming is stays at 125K, can I continue with the Roth as is and max out the 401k?
Depends on "which income?" - gross, Modified Adjusted Gross, Adjusted Gross, Taxable, etc. - that $125K is.

If that is your gross income note that traditional 401k contributions will decrease your Modified Adjusted Gross Income, which is what the IRS Roth contribution limits use.


Tjat

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Re: Difference between 401k and Traditional IRA
« Reply #10 on: June 04, 2015, 01:14:55 PM »

Thanks very much. My income is now 125K which I believe is the transitioning out range. Assuming is stays at 125K, can I continue with the Roth as is and max out the 401k?

Assuming you're talking about MAGI, you are correct that 125K is in the range where your contribution begins to be limited. However, assuming you don't have other traditional IRAs, you would also have the option of making a non-deductible IRA contribution and immediately rolling into a Roth 401K. This effectively skirts the income limits for Roths (and is legal).

Merdox

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Re: Difference between 401k and Traditional IRA
« Reply #11 on: June 04, 2015, 03:01:39 PM »
Sorry, 125K is my gross income. I benefit from very few exemptions (single, no mortgage), but that's a great point about 401k contributions reducing my MAGI. I'll plan on maxing out the 401k and continuing the Roth.

Tjat, how do you make non-deductible IRA contributions  to roll into Roth 401Ks? Do you have a link to sum this up for me in simple terms, by any chance?

MDM

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Re: Difference between 401k and Traditional IRA
« Reply #12 on: June 04, 2015, 03:12:32 PM »
non-deductible IRA contributions  to roll into Roth 401Ks
That is a "backdoor Roth" - google that term for more info.  But if you contribute directly to a Roth, ignore the backdoor route.