401k and Roth IRAs

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

  1. 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).
     


  2. 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.
     


  3. donjuan17

    donjuan17 Senior member

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    Pareto principle.
     


  4. donjuan17

    donjuan17 Senior member

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    Double post.
     
    Last edited: Jun 23, 2013


  5. 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?

     


  6. 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


  7. 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.
     


  8. 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


  9. 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


  10. 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.
     


  11. Spaceman Spliff

    Spaceman Spliff Active Member

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    thanks man, this is really helpful.

    i have one last question: i have an old 401k from my old company from a couple years ago, before i went to grad school. it's been sitting around and making decent gains on the investments, but i've kinda been wanting to roll it over into an IRA, just because i no longer work for that company and it seems inconvenient to hold onto some random 401k that i'm not contributing to anymore. would it be financially wise to do so? and if i rolled it into an IRA, would that rollover amount count towards that $5k max per year for IRAs?
     


  12. otc

    otc Senior member

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    Rollovers shouldn't count toward your contribution limit. You should definitely roll the 401k into *something* if only to make your life easier and cut down on fees if you were limited to expensive funds. A lot of brokerages offer cash bonuses for rolling over your 401k...not a ton of money but you might as well take advantage of it.

    One interesting option (that I think is still legal in 2013) is rolling it into a Roth. If you aren't eligible for a Roth because of the income limits, there were rules that you could still roll a trad-IRA or a 401k into a Roth IRA.

    You will have to pay the taxes upfront, but for some people it is still a beneficial decision (since it is a back door way to get at the "no future taxes" proposition of a Roth).
     


  13. Ketawa

    Ketawa Senior member

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    A rollover to an IRA wouldn't count towards your IRA contribution limits, but you may not want to do it. Are you now or in the future likely to be ineligible for direct Roth IRA contributions due to your income? If so, in those years you would probably want to do what's called a "backdoor Roth IRA" by making non-deductible contributions to a Traditional IRA, then immediately rolling it over to a Roth IRA. If you were to rollover a 401k with deductible contributions, you would make the balance of your Traditional IRA subject to the pro rata rules, and the backdoor Roth would be a bad deal.

    If these things don't apply to you, great, go ahead and roll it over to an IRA where you can get any low-cost investment. Otherwise, you might be better off leaving it in the 401k with better options and expenses.
     
    Last edited: Oct 7, 2013


  14. otc

    otc Senior member

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    I can't imagine the backdoor sticks around forever though.

    Wasn't it created as a way to nab some quick short term tax dollars? You get some high earners to pay a bit of extra tax this year by doing the rollover but you lose out on greater future taxes when they start drawing it down...

    Maybe they will want to keep some of that income flowing, but I would guess much of it is already gone...people will have moved their big accounts if they wanted to, so anything that is left will be a pittance (just the annual cap getting rolled over rather than many year's worth of savings).
     


  15. Ketawa

    Ketawa Senior member

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    The govt isn't getting more tax by letting people use a backdoor Roth, since otherwise there would be no option for IRA contributions, except for a nondeductible Traditional IRA which doesn't reduce the tax burden and is probably inferior to a taxable account. I don't think the backdoor Roth is that enticing that they're getting people to run afoul of the pro rata rules, since anyone likely to know about the backdoor Roth probably also knows enough to avoid those issues. We're talking a small amount of taxes for a very small number of investors.

    The Roth 401k is another story. The govt is probably getting a lot more in taxes from people using it when they shouldn't.
     


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