401k or something else?

Bjazzman · #1 08-07-2011, 08:13 AM

not looking for a political debate

im coming up on a year at my job where im entitled to start a 401k. My employer does not match contributions. With the economy as it is, i feel like it will take a long time before we see any progress with the stock market

i do have money in a traditional ira that i could add to. or, i could start another ira, or put my money into a savings account. found one in town that is more than 4%

any ideas? im only 31 now and have many working years ahead of me. im thinking that the retirement age will be about 72-76 by the time we get to it

Jhengsman · #2 08-07-2011, 08:23 AM

If I remember the rules correctly if you have a 401k available you have to claim money put into a traditional IRA as income and can't write it off as you can if you don't have an employer retirement plan. In a ROTH IRA while you still report the money as income taxes will never be paid on income or gains. Unless congress does a screw job in the future.

A ROTH IRA has other advantages such as a deep emergency fund. Since you have already been taxed you can get your contributions back without penalty in a worst case scenario.

1958Bassman · #3 08-07-2011, 09:07 AM

Quote:

Originally Posted by Bjazzman

not looking for a political debate

im coming up on a year at my job where im entitled to start a 401k. My employer does not match contributions. With the economy as it is, i feel like it will take a long time before we see any progress with the stock market

i do have money in a traditional ira that i could add to. or, i could start another ira, or put my money into a savings account. found one in town that is more than 4%

any ideas? im only 31 now and have many working years ahead of me. im thinking that the retirement age will be about 72-76 by the time we get to it

Any time you can have an organized way to save for retirement, do it. It's less a matter of how much you put in than how long you contribute that makes it possible to come out ahead. Over time, the cost per share will fluctuate and if you put the same amount in every month, your actual cost will be tempered because it's averaged, over that time period. The old adage "Buy low, sell high" is great, but that's only when you buy once or want to try to "time the market", which is risky. If you know for a fact that your income will be stable and reliable, your risk level can be a bit higher, [i]but only if you stop keeping the money in high risk funds/devices well before you reach retirement.[i]

OTOH, even with all of the rangling, if you join a public worker union, you'll still be able to retire better than most without extremely high wages.

The Roth IRA is a good way to grow your money without losting so much to taxation. For now- if things go the way they seem, I expect Congress to try to raid that, too.

Tat2dHeart · #4 08-07-2011, 09:58 AM

Be sure you understand your exit strategy at retirement before you decide. Pretax contributions today decrease your withholding liability and give you a better return in your take home pay, but when you start to draw at or after age 59 1/2, all of your payments are subject to tax. Post-tax contributions today mean that at withdrawal, you only pay taxes on the portion of each payment that was growth after your contribution. Those two things also have big impacts on how your estate is taxed if there is residual in the account to be inherited by your survivors after you die.

Longhair · #5 08-07-2011, 10:26 AM

You are better of gambling in Vegas than to let the current jokers running around looking for your best interests.

Dave Siff · #6 08-07-2011, 10:29 AM

Open a Roth IRA and max it out every year. ($5,000, then $6,000 after age 50.)

Unrepresented · #7 08-07-2011, 10:36 AM

Preface: I am not a financial adviser

With either an IRA or a 401K you have investment choices. Neither has to be heavily exposed to the stock market if you choose not to have it that way.

For me the benefits of a 401K are:

a) the money's harder to get to. Could be a negative, but I like it being protected.

b) the money is automatically deducted.

c) The maximum annual contribution levels are higher than the IRA.

If you feel that you can make contributions on your own at a rate that's as good or better than automatic withdrawals, and can stay away from it, I'd say continue to fund your IRA. That way you're not paying "maintenance" fees on two different accounts.

GregC · #8 08-07-2011, 11:07 AM

Quote:

Originally Posted by Bjazzman

not looking for a political debate

im coming up on a year at my job where im entitled to start a 401k. My employer does not match contributions. With the economy as it is, i feel like it will take a long time before we see any progress with the stock market

i do have money in a traditional ira that i could add to. or, i could start another ira, or put my money into a savings account. found one in town that is more than 4%

any ideas? im only 31 now and have many working years ahead of me. im thinking that the retirement age will be about 72-76 by the time we get to it

How confident are you in your ability to time the stock market? If you would feel better investing after the market was up 20% rather than down 20%, you're doing it wrong.

Sorry, I know it's a worrisome time and I don't mean to downplay that, but we are down 20% or so off the highs and that's generally been a good time to put in money. It could go lower, yes, so put it in gradually if you're still very concerned. You've got a long way to go, the market's in all likelihood going to be much higher by the time you retire.

As for which way to go (IRA or 401k), beyond tax considerations (which are important), consider which option has the better investment choice(s) for you.

Bjazzman · #9 08-07-2011, 11:20 AM

yeah im not good at investing personally but the guy who runs my traditional ira is. the only real concern is that my employer does not match contributions on the 401k. i can only assume that it's good to keep your money in a few different investments

Unrepresented · #10 08-07-2011, 11:22 AM

Quote:

Originally Posted by Bjazzman

yeah im not good at investing personally but the guy who runs my traditional ira is. the only real concern is that my employer does not match contributions on the 401k. i can only assume that it's good to keep your money in a few different investments

Unless you're paying maintenance fees for a bunch of small accounts, which percentage-wise isn't as efficient as paying only one fee for a large account.

m0nst3r · #11 08-07-2011, 11:25 AM

Since your employer doesn't match, open up a Roth IRA. Here are a few of the benefits:

1. It's after-tax, so all of your money grows tax-free. Generally, when you're older you'll find yourself in a higher tax bracket (because you make more money), so being able to withdraw from your Roth IRA and not have to pay tax is a big plus.

2. You have a lot more investment choices. In your company's 401(k), chances are that you are limited in your investment choices. Sometimes the investment choices offered by your company aren't very good, since they might have high management fees, even for something as simple as an S&P 500 Index fund (if they offer it). If you don't want to invest tons of time with this, a good thing to do is indexing. You'll pay minimum management fees, buy/sell fees, and you'll save a bunch of time. It's a very "set and forget it" type of mentality, but most of the time you'll come out on top of some of the best investment managers.

3. Let's face it, a lot of us might get into financial trouble in the future, and as a last resort, and I really mean that, you might have to dip into your 401(k). Instead of withdrawing or borrowing from your 401(k), which I highly highly wouldn't recommend because of the amount of fees you would have to pay, you can withdraw what you've contributed into your Roth IRA without paying penalties. Let's say you've contributed 10k, and your money has grown to 15K. Now let's say you have a crazy emergency. You can withdraw 10k without paying any penalties.

Also, for you, at age 31, it's a very good thing when the stock market takes a dive. Think of it as the stock market having a sale, so when you buy super cheap and still have 40 years for your money to grow, you're definitely maximizing your earnings.

GregC · #12 08-07-2011, 11:28 AM

Quote:

Originally Posted by Bjazzman

yeah im not good at investing personally but the guy who runs my traditional ira is. the only real concern is that my employer does not match contributions on the 401k. i can only assume that it's good to keep your money in a few different investments

Ah, are you paying him a fee somehow--either separately or through the commissions and fees associated with the investment(s)? Unless he's giving you a lot of financial planning help, I'd suggest investing on your own--fees and commissions will take a substantial bite out of your returns.

bassman03 · #13 08-07-2011, 12:05 PM

I know I'm only 18, but the best way I've heard it is to save up 10-15% of your yearly salary. Put what you can into your 401K. From there your company matches it. And then from there put the rest into a Roth IRA. So just for easy numbers sake say you make 100,000K a year. You're able to put in $5,000 and your company matches $.50 to the dollar. So after the $5,000 you put in and the $2,500 your company gives you, you're up to $7,500. To get to 15% then you would need to put $7,500 into a Roth IRA. 15%
is probably a bit steep, but I think it shows what I'm talking about. I might have some things off in that, but I still think it makes sense.