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401k and Roth IRAs

Discussion in 'Business, Careers & Education' started by jakeyt, Mar 23, 2013.

  1. norcaltransplant

    norcaltransplant Senior member

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    The problem with the conversion, is that if you have a significant amount of savings in a traditional IRA which cannot be rolled into another tax sheltered vehicle (e.g. 401k) you are automatically taxed on the basis at your marginal income tax bracket. Fees for closing account are usually nominal (I paid ~$100 per institution). The fees and, primarily, the additional incurred taxes, however, can easily offset the potential gains of funding a backdoor Roth.

    The Backdoor Roth is very young (c. 2010) and, IMO, will close sometime in the future.
     
    Last edited: Mar 27, 2013
  2. norcaltransplant

    norcaltransplant Senior member

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    FWIW, my hierarchy of financial priorities for the OP would be:

    1) emergency fund (3-6 months in short term accounts like HY online savings or CDs or Ibonds after 1-year holding)
    2) Consumer Debt (Credit Cards) if APY >10%
    3) 401k up to company match if you are staying for >2 years
    4) Roth IRA
    5) The remainder of your 401k
    6) Medical savings accounts (esp if you have children)
    7) Taxable savings
    8) Fun

    Edit: At 2.3% let your student loans sit, especially if you still qualify for any student loan interest deduction. Think of it as hedge against rising inflation with a built in put option.
     
    Last edited: Mar 27, 2013
    1 person likes this.
  3. jakeyt

    jakeyt Senior member

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    Wow, I like this comment. Awesome answer. Thumbs up from me. I agree, the student loans with low interest make it worthwhile to sit. I was thinking about applying for a way to do an extended payment. Right now its too high at $400, but if I can get it down to $166 a month, I can use whatever is left over into an IRA. The question is then do I do a 4-year or 2-year interest only payment. Any thoughts? I would still try to pay it off in 5-10 years (my current schedule), but at least I focus on money into retirement than paying off such low interest debt.
     
  4. norcaltransplant

    norcaltransplant Senior member

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    You can recharacterize a Roth. See for the above link.

    Your age, however, is the greatest benefit to contributing to a Roth
     
  5. jakeyt

    jakeyt Senior member

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    Here is the link I am talking about https://www.fidelity.com/retirement-ira/ira/401k-rollover which says a 401k rolling over to an IRA. Maybe I misunderstand what this means?
     
  6. jakeyt

    jakeyt Senior member

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  7. norcaltransplant

    norcaltransplant Senior member

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    Look man, you need to start reading about the differences between Traditional IRAs, Roth IRAs, 401ks/403bs, and HSAs/FSAs. Each product has advantages and disadvantages based on different tax strategies and expectant incomes. I didn't know much about any of the above six years ago, but I was forced to learn.

    The only person who has an honest interest in the well being of jakety is yourself. It behooves oneself to spend a little time and self-educate yourself. Start with the Boglehead website and the personal finance section at Barnes and Noble.
     
    Last edited: Apr 1, 2013
  8. SkinnyGoomba

    SkinnyGoomba Senior member

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    Most companies with a 401k plan also provide advisor service.....use it.
     
  9. donjuan17

    donjuan17 Senior member

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    A question: I just started real work and only really have a checking account with my dad's bank choice, the dreaded Bank of America. I grew up in a lower middle class family and my dad was never really aware of good finance tips.
    I have been looking into the Roth IRA plan and am very interested.
    My question is this, should I close said checking account and use the Roth IRA as I would a checking account? If not, what can I pair my Roth IRA with to make this possible (better checking account)?
     
  10. gettoasty

    gettoasty Senior member

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    You cannot mix qualified money with non-qualified money, meaning, you cannot co-mingle the money type.

    Open a brokerage account with your checking account, or invest, or just let it sit there doing nothing but have some liquidity if you need it (you sound young so it can be there for emergencies)

    Open up a Roth IRA with the many commercial / investment banks out there or through a broker/RIA. However, you should first maximize your 401(k) if offered for the tax savings then consider a Roth IRA.
    If there is no company benefit program installed, consider an IRA before the Roth.

    Just my 2 cents.

    edit:
    Advisor services are not helpful unless you work through a 3rd-party investment advisor. For example, if your custodian is through Fidelity, the most a Fidelity rep will help with is give you a breakdown of what options are available within the 401(k) plan, performance etc. but actual advice is against the law as there is a conflict of interest.
     
    Last edited: Jun 21, 2013
  11. The Rural Juror

    The Rural Juror Senior member

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    Good for you for getting a job and looking into these things. To answer your question: no. Roth IRAs and checking accounts are completely different. You will always have a checking account, and Bank of America is fine. If your parents have access to your checking account, I would recommend cutting that tie and getting your own account now that you have your own job. Next you need to learn the absolute basics of personal finance, investing, saving, retirement planning etc.

    A retirement account (such as a Roth IRA) is kept in addition to your checking account. The first thing you need to do is find out if your work offers a 401(k).
     
  12. otc

    otc Senior member

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    http://www.amazon.com/Will-Teach-You-To-Rich/dp/0761147489

    Just buy that and read it. You don't have to follow all of the advice and you could probably find it all written about in a billion different free blogs online, but that is one book that you can buy for $10, and read in a few hours, that will leave you more knowledgeable about 20-something personal finance than 95% of 20-somethings.
     
  13. donjuan17

    donjuan17 Senior member

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    Pareto principle.
     
  14. donjuan17

    donjuan17 Senior member

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    Double post.
     
    Last edited: Jun 23, 2013
  15. Spaceman Spliff

    Spaceman Spliff Active Member

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    i have a friend in wealth management who doesn't see retirement funds like 401k's and IRAs as a particularly smart investment for a lot of young professionals, especially when the company doesn't match. according to him, 401k's and IRA's, especially the non-roth stuff, aren't really great for young professionals because they'll most likely be in a higher tax bracket when they retire. thus, they're just delaying the taxes they'd have to pay rather than tax-sheltering my money (and they'd end up paying more in the end). basically, what this means is that the only real benefit they'd be likely to get is whatever the contributed money makes from the investments.

    he wasn't saying not to invest in them at all, but he recommended that i put my priorities elsewhere.

    is there any truth to this?

     
  16. otc

    otc Senior member

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    your friend is an idiot and should be fired by any clients he actually has.

    Sure, you might pay higher taxes on the actual distributions from the 401k/IRA, but you won't pay a single cent of taxes on the churn all of the way up. Might not be an issue if you buy the same fund and never sell it (though you still pay income tax now + cap gains in the future, as opposed to just income tax in the future), but if you do any amount of re-balancing or changing from one fund to another, you would get a tax hit.

    Especially for young people, who have 40 years of investing until they retire. That's 40 years of churn on which they will pay cap gains (and income tax for shorter holds) if they don't have an IRA or 401k. Factor in the fact that capital gains are at an all time low and can basically only go up...and your friend should probably be sued for defrauding his clients.
     
    Last edited: Oct 4, 2013
    2 people like this.
  17. otc

    otc Senior member

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    and wtf does he mean by "especially the non-roth stuff"? That should be "only the non-roth stuff"

    the roth stuff is designed specifically for the problem of thinking you will be in a higher tax bracket in the future.

    So yes, if you don't get a company match and expect to earn more in the future, your first investments should be into a Roth IRA. And if you don't get a match and are ineligible for a Roth, then you should invest in the traditional IRA first since it gives you more control than an 401k.

    Otherwise your order should be this (for retirement dollars only...should have regular savings too):
    401k up to company match
    Roth to max (if eligible, otherwise consider traditional IRA options here)
    401k to max.
    Non-advantaged investments.

    Just stop wherever you run out of retirement money...I doubt you will be maxing both a roth and a 401k if you still have the income to be eligible for a roth.
     
    2 people like this.
  18. Spaceman Spliff

    Spaceman Spliff Active Member

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    it's possible i might be misquoting him on a lot of what i said...i'm pretty dumb when it comes to this type of stuff.

    anyways, my company doesn't match at all for the 401k and i'm ineligible for a roth. i can afford to max out both my 401k and ira contributions. is this something that i should do in your opinion?

    i'm young, unmarried, and have don't have any debt or substantial assets, if that matters
     
    Last edited: Oct 5, 2013
  19. otc

    otc Senior member

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    Yes.

    I mean, maxing them both depends on how much you want to spend. If you make too much for the Roth, you probably make too much for the initial tax exemption so it might be wise to put money into the 401k first if your investing options are relatively good (and then go IRA after hitting 401k max).

    The only reason to go IRA first is if your company only offers bad investing options (limited/high fee funds). You can also roll a 401k into an IRA any time you change jobs...so you won't be tied to your company's 401k provider forever.

    edit: and don't forget, 401ks and IRAs are protected from many things. If you go back to school or send kids to school in the future, they aren't going to ask you to draw down from a retirement account to pay for it. But if you have tons of money in a normal bank/brokerage account, the school is taking it.
     
    Last edited: Oct 5, 2013
    2 people like this.
  20. Ketawa

    Ketawa Senior member

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    People who have investing questions, you all need to head over to the Bogleheads Wiki and start reading.

    http://www.bogleheads.org/wiki/Main_Page

    Also post at the forum, it's an amazing resource with countless helpful people.
     

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