Author Topic: Invest in 401K or Index Fund or Roth IRA (or ALL)?  (Read 2128 times)

E in DC

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Invest in 401K or Index Fund or Roth IRA (or ALL)?
« on: January 20, 2016, 02:33:05 PM »
Hello out there! 

I'm new on the forum, and my family and I are just kicking off what's hopefully a 10 year (or lesS) journey to financial independence.  My wife and I are spending the next year or so paying off our student loans and the family car.  Then, it's full-bore into investing mode. 

I'm trying to get ahead on planning for investing and can't seem to pinpoint specific advice around how much we should contribute to our 401K plans vs Roth IRAs vs index funds. 

I don't personally get a company match, so I'm of the mind that maybe I should just go with a mix between a Roth IRA and the index funds.  I also don't want to have all of my money tied up in the 401K and take a penalty on withdraws since I'll be retired way before I'm 59 1/2 (I hope!). 

If anyone has specific or general advice on the balance of investments, I'd really appreciate it.  I'm sure there's a MMM post that covers this, but I can't seem to find it. 


Thanks!

-E in DC

Frankies Girl

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Re: Invest in 401K or Index Fund or Roth IRA (or ALL)?
« Reply #1 on: January 20, 2016, 02:45:23 PM »
First thing, good for you! :)

Second, you need to do lots of reading and get up to speed on the correct terminology and methods of basic investing and how the market (basically) works. http://www.investopedia.com/ is a good source for basic definitions.


You sound a bit confused saying you'd like a mix of Roth IRA and index funds...

Things like 401k/403b, Roth IRA, traditional IRAs, taxable brokerages... those are all types of accounts. Just like you'd have a savings account or checking account - they are holding buckets you put your investments into.

Index funds are a type of investment. They are a classification of a mutual fund or exchange traded fund (ETF), but not all mutual funds/ETFs are index funds. You can have an index fund inside of a 401k, or a Roth IRA, or whatever.



To get a basic understanding I'd suggest you read Jim Collins' stock series through: http://jlcollinsnh.com/stock-series/
It is long, but worth it.

And further good reading here: https://www.bogleheads.org/wiki/Main_Page

And you should be taking advantage of the tax deferred accounts as much as possible (things offered through work like 401k/403b or traditional IRAs in most cases) because they have the two fold benefit of reducing your taxable income now (meaning you're paying out less to the IRS each year) and investing it now so it's growing tax free as well. Super awesome!

You absolutely can tap traditional retirement accounts before 59.5, so do not avoid them:
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

It will be up to you to figure out whether it makes more sense to have traditional or Roth IRAs (it's based off of your income now vs. what it will be in retirement and whether you do end up creating a Roth pipeline).


E in DC

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Re: Invest in 401K or Index Fund or Roth IRA (or ALL)?
« Reply #2 on: January 20, 2016, 02:58:27 PM »
Wow.  That's super helpful advice.  Ask and you shall receive, as they say.  It's dawning on me very suddenly that I've got A LOT to learn in the next year or so.  I'll dig into all of those resources and see where they lead. 

Thanks!


P.S. If anyone out there has anything to add, by all means, keep it coming!