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401k and Roth IRAs

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

  1. JJeff

    JJeff Member

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    A 401(k) and a Roth IRA both offer different advantages and disadvantages. If these are your primary retirement vehicles, it would probably be smart to invest in both and split your total investment. An IRA typically has a cap of how much you can invest each year. Focus on investing in your IRA until it is capped out. Then begin to shift more into your 401(k). The reality is that in a good market, a 401 will ultimately generate a larger return than an IRA. The advantages of an IRA, however, is the fact that you won't wake up one day and realize that half of your investment has suddenly vanished as can happen with a 401.
     
  2. Ketawa

    Ketawa Senior member

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    Most of this is wrong.
     
    1 person likes this.
  3. austinite

    austinite Well-Known Member

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    Yeah, by its nature, an IRA allows you to take on whatever risk level you want (you pick the investments).

    To start you always want to max anything your company matches. That is free money. After that I would focus on anything that is 100% tax free like an HSA. Then I would do the Roth IRA provided your income is in range. If you have anything left after that you can do a traditional IRA. I probably wouldn't put anything in the 401k beyond what gets matched.
     
  4. mkarim

    mkarim Senior member

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    Why not? Granted, you are restricted to the mutual funds in the Plan, but its not a bad way to shield that money from taxes until you are ready to roll them into a Roth. If one doesn't like any of the stock mutual funds, one can put the money in a money market mutual fund in the Plan.
     
    Last edited: Jan 8, 2014
  5. otc

    otc Senior member

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    You can't put money in a Roth and then into a traditional. The caps aren't separate.

    So once the roth is maxed, your retirement dollars should go back into the 401k realm.

    Generally (I'm sure I have written this on here before so sorry for the repeats) you want to go:

    1. 401k to the max employer match.
    2. IRA to cap (Roth or Trad depending on your situation).
    3. 401k to the max.
    4. Non-tax-sheltered accounts.

    Of course, if you make it to #4, you either have a really high savings rate, or you are past the income range where a roth is an option...Presumably you are doing all of your short term savings in between #2 and #3 (emergency fund, down payment, travel, etc).
     
    2 people like this.
  6. mkarim

    mkarim Senior member

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    +100
     
  7. gettoasty

    gettoasty Senior member

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    Yeah I am changing it up this year. I am contributing enough and then some, but not by much in order to meet the ER match. Will then max out an IRA this year since I still qualify. A good portion of my take home pay will then payoff my student loan that I plan to pay it all in 2014. Remaining money is for spending and CE. As someone else mentioned I will go speak with my bank to see if I can open up sub-accounts that can automatically allocate per deposit to create further savings for various things like a home, travel/vacation, etc.

    On the other hand, I am not sure if the IRA deduction will be that beneficial and believing that my tax bracket will increase in the future a Roth maybe a better idea. Might just do 50/50 this year.
     
    Last edited: Jan 8, 2014
  8. austinite

    austinite Well-Known Member

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    You are right, not sure what I was thinking there.
     
  9. jakeyt

    jakeyt Senior member

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    Does it make sense to do a 401K then convert it over to a Roth IRA? Can this be done at the end of every year or can the conversion only happen after you leave a company? I researched it a bit but this is not clear to me. If I have the limit of $17,500 in 2014, can I convert the entire thing?

    One thought is that I'd like to buy a house. Rather than let that money sit in a different account doing nothing, I thought I could use whatever excess money to put into my Roth IRA and withdraw it (the principal) when I am ready to put down a deposit.

    Thoughts?
     
  10. mkarim

    mkarim Senior member

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    The $17,500 is the annual limit is for contributing to your 401K. You can only rollover your 401K after you leave a company. The annuak limit to CONTRIBUTE to a Roth IRA is $5,500. However, when you leave a company you can rollover your entire 401K money into a Roth IRA as rollovers are not subjected to the $5,500 annual limit. However, if your 401K contributions were pre-tax, you'd have to pay taxes on rollover funds; if your 401K contributions were in Roth 401K format you won't have to pay taxes when you roll over, since you've already paid taxes on them.
     
  11. jakeyt

    jakeyt Senior member

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    I cannot roll over until I leave the company, correct? What if I open a Traditional IRA account?
     
  12. mkarim

    mkarim Senior member

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    Same rules apply, except that you won't be taxed when you roll over 401K funds into it. You'll be taxed whenever you withdraw from it.
     
  13. jakeyt

    jakeyt Senior member

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    Traditional IRAs still have a $5,500 limit right? Yes. I checked on the IRS page.
     
    Last edited: Apr 6, 2014
  14. norcaltransplant

    norcaltransplant Senior member

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    Btw, the deadline for 2013 contributions is also April 13th. For those who are converting to a backdoor IRA, remember to keep a safe record of your 8606 forms.
     
  15. otc

    otc Senior member

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    What's the process for switching from a roth to a traditional IRA if your AGI is too high (even after 401k/other deductible expenses) to qualify for the Roth? Can you just re-characterize the deposits from that year, or are there penalties/complications?
     
  16. jakeyt

    jakeyt Senior member

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    This is just to fund the account right? I don't have to make any investments by April 13?
     
  17. norcaltransplant

    norcaltransplant Senior member

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    You just have to fund the account before the 15th. I haven't actually completed by Roth conversion from last year, which is really bad since the S&P appreciated 25% and the funds were sitting in a money market type fund.

    Are you trying to fund a Backdoor IRA? I use Vanguard, so I can't vouch for other brokerages, but you just use your existing account to fund a "new" Roth IRA. It's an all or nothing maneuver, so if you have existing funds with a tax deferred basis, they will count as income during your conversion year. I believe this was the original intent of the government to generate short term tax gains in 2010. If you have more questions about backdoor IRAs and how they apply to your current financial situation, I would recommend posting on the Bogleheads forum. The posters are extremely knowledgeable, though conservative in their financial planning and investing strategies.
     
    Last edited: Apr 8, 2014
  18. gettoasty

    gettoasty Senior member

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    Why would someone contribute into a non-deductible IRA? Why not just contribute into a Roth?
     
  19. Ketawa

    Ketawa Senior member

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    There are income limits for Roth IRAs and deductible Traditional IRAs, but no limits for non-deductible Traditional IRAs. And there are no limits on converting a non-deductible Traditional IRA to a Roth IRA.

    http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
     
    Last edited: Apr 8, 2014

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