401k vs Roth IRA

[LordSnailz]

if I was to put money on only one of the above - which should it be? I'm totally clueless on these topics so try to be as detailed as possible.

one catch is that the co. does not match my contribution to 401k, not until I've worked for 2 complete years with the company.

My basic understanding was -
401k - before tax but taxable when you take it out. I heard there were exceptions though, like when you're buying a house. true??
- max contribution 15%

Roth IRA - after tax but not taxable when you withdraw later on.
- max contribution 3k

age - 23
school loan and car loan totals to about 20k.

tia!
ls

 

[ShizNitz]

Definitely invest in a Roth IRA. 401Ks can be a great investment tool especially when combined with company match. However, if your company does not match, the amount of your return vs investment is greater after cashing out the Roth IRA as opposed to a 401K. There are numerous other factors to consider (such as whether you might want to borrow on your balance, buy a house, etc...)

Check out these websites:
Roth IRA vs Employer Plan
Financial Planning

 

[vi edit]

Well, I do both, but in your case I'd go Roth IRA. You'll have more control over the $$, and won't have to worry about not being vested. Also, if you change employers you won't have to deal with the problem of rolling your 401k into an IRA.

The Roth is post tax, and won't leave you paying the tax man in 40 years when you retire.

401ks are great, but if they aren't matching you and you plan to leave before they will, then just go Roth.

 

[AmigaMan]

401Ks are good because it lowers the amount of tax you have to pay the government as well. Could make a difference especially if you're near the lower edge of your tax bracket. It could bump you down into a lower one.
I currently invest in my 401k because my employer will match 50% of the first 6% of my income. After that they don't match anything. So I'm almost maxed out (5% right now) and when I do, I'll start in on a Roth.

 

[linuxboy]

Hi LordSnailz .

when deciding the best option, what you have to evaluate are long-term and short term financial plans. That is, what are your goals in investing. That will allow you to pick a conservative or aggressive or moderate strategy and diversify your risk. So far all you have told me is that you have loans, that you have a job, and that you want to invest. That's not really helpful. But let me try and give you some highlights of IRAs and 401ks.

IRAs come in 3 flavors, traditional, Roth and Educational.

Traditional
-mandatory distribution requirement at 59.5
-tax deductible (MAGI restrictions on deductions)
-tax deferred growth
-3 K limit 2002
- 10 K toward expenses/first home or medical expenses more than 7.5 % AGI

Roth
-tax free growth
-3 K limit 2002
-not deductible
-can take out money but only in FIFO method, and when you take out any interest or gain, you get taxed on it and can only do this after 5 years
-10 K toward first home
-can contribute after 59.5

Educational
-2K limit
-non deductible
-160 K MAGI limit
-can be used to fund another eligible child, flexible



401K
-really cool since if you file bankruptcy, it is protected
-possible employer matching
-of course, tax deferred growth
-11 K limit 2002
-1 K catch-up limit 2002
-can take a loan on it for 10 K
-can't touch until 59.5
-you want this as you can transfer it from employer to employer and everyone has them so why not do it, especially if you get contributions == free cash


hope that helps. If you want financial advice, you're better off talking to someone in person and have them provide you with a comprehensive solution. May be pricey but worth it in the end if you want to meet your goals.

Cheers !

 

[Queasy]

In your case, I would invest in a Roth IRA until you get to a point where your company matches. The main benefits to 401(k)s are the company matching and the reduction in your taxable income.

For your first job out of college, I don't think you are going to be making enough that a 401(k) contribution will be making a signifcant dent in your taxable income.

Since you don't get the matching, Roth IRA is the way to go for now.

 

[linuxboy]

And just to add to what the others have said:

Roth gives you more flexibility but there are tax disadvantages as you can't deduct... A traditional IRA means you can't touch the cash but it's a set payout when you read 59.5 and you can deduct it. A 401K is kinda like a traditional IRA but with your employer. Also, you may want to look into other tax-deferred options like VULs (possibly VAs) that many many people do not know about and that can provide you with the solution you need and the best method to reach your financial goals(which you should set instead of just going "yeah, this is probably good, maybe I should invest into something"


Cheers !

 

[Maetryx]

What's a VUL or a VA?

 

[LordSnailz]

wow - awesome responses thanks for the help!

queasy/linuxboy - let me see if I could provide some more info. -

salaray bracket - 50-60k
investment goal - I'm thinking long term on a moderate approach (does this say much? )
thinking of purchasing a condo in the near future - 5 yrs. from now.

Taking a few steps back -
-What is the APR for a Roth IRA vs 401k? I know the 401k depends on what you invest in but what about Roth IRA? Is is a fix amount every year?
-Do I get penalize if I take money out of my Roth IRA anytime? I know 401k you do.

Thanks again guys!
ls

 

[sohcrates]

i'm in the same salary bracket and investment goal as you are.

i have several roth IRA's already, (but i also have a 401K type deal).

I would suggest the roth, though really 401k's and IRA's are meant to be "35 year plans" or whatever...i.e. retirement.

If you're looking to make money for a mortgage, mutual funds and stocks are the way to go

 

[vi edit]

<< Taking a few steps back -
-What is the APR for a Roth IRA vs 401k? I know the 401k depends on what you invest in but what about Roth IRA? Is is a fix amount every year?
-Do I get penalize if I take money out of my Roth IRA anytime? I know 401k you do.
>>



You can dump your IRA into anything you want really. I've got mine in a growth orient mutual fund, but in April I'm going to switch over to an S&P 500 based index fund. Rates of return are stockmarket based. Generalized return rates are 10% over the life of the stock market.

401k's are usually a lot more diversified. I know that my 401k is split among 6 different categories, which are then in turn split down into 100's of different companies. Risk is dependent upon what level you want to assume.

Both 401k's and Roth IRA's are long term because of the penalties that you incur when pulling out early.

 

[ShizNitz]

You have numerous options with both a 401K and a Roth IRA such as:

1. Higher-risk Mutual funds
2. Lower-risk Mutual funds
3. Bonds

Depending on how aggressive your investment strategy is and if iyou're in it for the long term, I would recommend High-risk mutual funds (especially since you're young). Time and time again, the stock market has proven to be the BEST investment for the long term.

Since you plan on buying a condo in the near future, it might be wise to try bonds and lower-risk mutual funds. This way, you can be assured that you won't have to take a loss when you need the money.

 

[Orsorum]

Can you do a Roth IRA through any broker, or is there a specific process you have to go through?

 

[spankyj]

My advice - go to the fool.com . They are very detailed in their explanations, and they can literally walk the most basic investor through some pretty challenging stuff. If you have some time to kill, they will help you out. They're not in the business to sell you stocks, bonds, gain accounts, that type of thing - rather they educate the investor. Check it out.

A Roth is simply an investment vehicle. There are limits, but you can pretty much buy whatever you want with it. The money sits there till you invest, so nothing is guaranteed. If you check out the fool or other type sites, you'll see what type of withdrawals are allowed without a penalty. Off hand, I can think of first time home buying as one such break, although this has to be after 5 years, and I'm not sure how a condo fits into that category. It's really a good deal - I just graduated college and have paid little to date in taxes. So essentially, my investment in Roth is tax free on both ends. The tax laws have been changed to include student loan interest as deductible I believe; perhaps this could help you decide. Your best bet is to check out sites online. Don't listen to our opinion, rather get a feel for beliefs, then compare and see what is BEST FOR YOU.

Roth IRA's can be done through most discount brokers as far as I know. If you are interested in one, I recommend using Scottrade for your account. No fee IRAs, free mutual fund transactions, low commissions. But again, CHOOSE WHAT IS BEST FOR YOU.

 

[Mister T]

<< What's a VUL or a VA? >>



VUL: Variablue Universal Life (type of insurance policy with a cash accout)
VA: Variable Annuity (as opposed to a fixed annuity that usually have guranteed rates of return)

 

[Mister T]

LordSnailz,

My recommendation is that you do both.

- Max out your 401K @ 15%
- Max out your Roth

If you can can't put that kind of money in, reduce 401K to 10% or 5%....

FYI this is what I do:

Max out 401K at 20%
Max out Roth IRA for last 4 years

 

[Queasy]

Snailz - If investing in a 401k pushes your taxable income below $50,000 go ahead and do it. The savings from moving into a lower tax bracket are worth it IMHO. You can take that savings and invest it into a Roth IRA

You can take a loan out on a 401k for a home purchase. I would recommend against it, however. That money is better left sitting in your 401k gaining interest for you.

You are penalized in both the 401k and the Roth IRA if you take money out early.

Some of the others on here are correct though. If you can afford to invest in both, that is the best way to go. If you are more concerned about paying off your debt, pick one to invest in and use the rest of the money to pay off your debt.

Fool.com (as mentioned) is a great site as is TaxPlanet.com