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My company's new 401k plan includes the option to do a Roth 401k. Up until now I've been maxing out my Roth IRA, as we haven't had the 401k option. Should I assume that it would be best to take the Roth 401k option over the traditional pretax contribution? For background I'm 26 right now and optimistically think I will be in a higher tax bracket later in life.
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Jan 25, 2012 02:38
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Chin Strap posted:By ignoring mandatory withdrawals you are making the math extremely biased in your favor. Most folks will be forced to take out money at at a higher than base marginal rate anyway. Sure. It's an illustration, not advice. I used a vast oversimplification entirely so I could do the numbers in my head in a little bit of spare time before I left for work. I'm not saying that pretax is superior to posttax savings, only supporting gp2k's assertion that it's situational: gp2k posted:Put another way, if you put $5000 into a Roth IRA when you're 66 years old, then retire the next year, there will be little to no investment growth to speak of (maybe even negative growth). So in that case, a Roth wouldn't make sense, since you just paid maybe 35% taxes on that money, but didn't have it in the account long enough to grow to where the tax savings on growth were enough to compensate for the income tax you paid on it. If you're not at the limits (remember that example of being able to save $7692 in a standard 401(k) vs $5000 in a Roth) and are going to stop working or wind down to a "keeping busy" job in the near term, before you can make any significant gains, there may be some savings involved in saving pretax. I'll go make a quick edit to make that clearer. Cassius Belli fucked around with this message at 14:35 on Jan 25, 2012 |
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Jan 25, 2012 14:29
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robcat posted:My company's new 401k plan includes the option to do a Roth 401k. Up until now I've been maxing out my Roth IRA, as we haven't had the 401k option. Should I assume that it would be best to take the Roth 401k option over the traditional pretax contribution? For background I'm 26 right now and optimistically think I will be in a higher tax bracket later in life. There is so much uncertainty that far in the future that you really have no idea what the tax rates are going to be... generally or for you. Perhaps the best advice would be to keep a balance of pre-tax and post-tax vehicles. In that case I would stick with the standard 401k
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Jan 25, 2012 15:30
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Yond Cassius posted:If you're not at the limits (remember that example of being able to save $7692 in a standard 401(k) vs $5000 in a Roth) and are going to stop working or wind down to a "keeping busy" job in the near term, before you can make any significant gains, there may be some savings involved in saving pretax. Maybe I'm misreading what you'r saying but you have that backwards. Placing $5000 in a roth IRA is the equivalent of $7692 in a traditional IRA (assuming a 35% tax rate.) Do note that the max for both is $5000 so functionally the roth IRA is able to shelter more money which is why all things being equal it is the superior investment vehicle. Oh I see you were talking about comparing all retirement accounts including 401(k) I thought we were still just talking about trad vs roth IRAs. Vomik fucked around with this message at 15:34 on Jan 25, 2012 |
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Jan 25, 2012 15:32
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Vomik posted:There is so much uncertainty that far in the future that you really have no idea what the tax rates are going to be... generally or for you. Perhaps the best advice would be to keep a balance of pre-tax and post-tax vehicles. In that case I would stick with the standard 401k Yeah, my downstairs neighbor told me that her "friends in high places" told her that the tax laws are going to RADICALLY change in the next month or two and I should just hold on to my money if I don't want it to disappear.  Also didn't appear to know the difference between traditional and Roth IRAs. Thanks crazy lady, I will be sure to take your advice to heart.
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Jan 25, 2012 17:08
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Was just about to setup the ROTH IRA when another thought struck me, should I put this in my wife's name? She's 7 years older than me... I doubt we will ever struggle with separation or divorce but if the worst happened to I have any entitlement to a retirement account in her name?
Sephiroth_IRA fucked around with this message at 05:22 on Jan 26, 2012 |
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Jan 26, 2012 05:19
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Orange_Lazarus posted:Was just about to setup the ROTH IRA when another thought struck me, should I put this in my wife's name? She's 7 years older than me... I doubt we will ever struggle with separation or divorce but if the worst happened to I have any entitlement to a retirement account in her name? Why not have two Roths? One for you, one for her. If you can't afford that, and you're expecting divorce, don't put it in her name (obviously). The judge still might split it as part of a deal but you're in a better negotiating position if it's in your name.
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Jan 26, 2012 07:21
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Not really worried about a divorce now or in the future but I would like the ability to be able to withdraw distributions 7 years earlier because of her age. She also already has a 401k through her work.
Sephiroth_IRA fucked around with this message at 14:24 on Jan 26, 2012 |
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Jan 26, 2012 14:20
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Orange_Lazarus posted:I doubt we will ever struggle with separation or divorce but if the worst happened to I have any entitlement to a retirement account in her name? This partially just depends on your state, but generally speaking, usually spouses can have that stuff split up. The reality is, if a couple splits and it was not amicable, the courts would look at total assets that have been gained while the couple was together and determine a fair way to split all of the assets. This can be state dependent though.
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Jan 26, 2012 17:23
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You can also withdraw contributions (but not earnings) penalty-free from a Roth, is that not enough to bridge the gap?
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Jan 26, 2012 17:27
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I have a question about that though, if I withdraw principal am I able to repay that principal back into the fund? Ex: I remove $20k for a down payment on a home. Am I able to deposit 20k in addition to my yearly allowance of $5k that year?
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Jan 26, 2012 19:03
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Orange_Lazarus posted:I have a question about that though, if I withdraw principal am I able to repay that principal back into the fund? Corrected: Once you make a withdrawal you plester1 fucked around with this message at 19:49 on Jan 26, 2012 |
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Jan 26, 2012 19:35
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plester1 posted:Nope, once you make a withdrawal you can't make it up. It's explicitly that way to discourage their use as a savings account or for tax-free short-term investments. You can return the contributions if it's within 60 days of withdrawal.
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Jan 26, 2012 19:43
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I stand corrected. However, if I had the cash to replace it within 60 days, I would just use that for the down payment, not use an IRA withdrawal.
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Jan 26, 2012 19:48
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You guys have answered all of my questions, thank you. Edit: Wait a loving second, does this mean I could just start keeping my regular savings in a separate Roth IRA and use it as a savings account? Isn't the principal in certain accounts FDIC insured? If so I will definitely be opening two roths tonight. Sephiroth_IRA fucked around with this message at 21:32 on Jan 26, 2012 |
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Jan 26, 2012 21:00
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Orange_Lazarus posted:Could always try an 0% introductory rate loan to try and extend the debt. Either way you guys have answered all of my questions, thank you. If within the Roth IRA account you put the money into a CD or maybe a money market vehicle of some kind, yes, it would be FDIC insured. Other investments, even if made within a Roth IRA, would not be. Your money also wouldn't grow very much, which would kinda squander tax advantage. Also, I think you can only do the withdrawal/replenish thing for a Roth once every 12 months.
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Jan 26, 2012 21:37
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Yeah the accountant at work also reminded me that I would still have to keep certain minimums within the account, ex: 1000 in the 2060 fund, it's definitely something to consider though. I'll have to look this over tonight.
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Jan 26, 2012 21:50
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So I haven't invested yet in the 2012 portion of my Roth IRA, what is the best way to invest in it? Should I plump down the maximum amount ($5000, if I have it) right away? Or would it make more sense to keep monthly installments of $454? Pros to lump that I can see: more time on returns, if funds are upwardly mobile. Pros to installments: buy shares regularly, possibly buying at lower prices spread over time, rather than buying all at one time at one price.
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Jan 27, 2012 04:34
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It's really up to you. There isn't likely going to be a signifigant difference in the two over the lifetime. If you have a lot of money put aside and this money isn't going to be in another investment vehicle, I'd say just put the whole $5000 in right now. If it's cutting into your emergency fund or making things tight at all, just go to monthly.
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Jan 27, 2012 06:16
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If you can afford it, $5000 right now. You can always withdraw your principal in case of an emergency.
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Jan 27, 2012 14:28
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Orange_Lazarus posted:If you can afford it, $5000 right now. You can always withdraw your principal in case of an emergency. If you want that option, don't forget to pick e.g., a CD as your investment vehicle inside the Roth.
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Jan 27, 2012 16:31
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Speaking of maxing your Roth as soon as possible. Is it a bad idea to max your 401k as soon as possible? I understand missing out on dollar-cost-averaging, and possibly being penalized by your plan for maxing too soon in the year. But my plan at work allows up to 50% of salary (paid monthly) in contributions, with the company's match for the year paid at the start of the next year. And that is a 2% per dollar match up to 6% of salary.
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Jan 27, 2012 16:44
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substitute posted:Speaking of maxing your Roth as soon as possible. Is it a bad idea to max your 401k as soon as possible? I understand missing out on dollar-cost-averaging, and possibly being penalized by your plan for maxing too soon in the year. But my plan at work allows up to 50% of salary (paid monthly) in contributions, with the company's match for the year paid at the start of the next year. And that is a 2% per dollar match up to 6% of salary. e: I thought it's actually better in the long term. Too lazy to look it up though. Basically, if you assume that prices are trending upwards in the long term (and if you are investing, I would think that would be your assumption), you want to get your money in as early as possible. gvibes fucked around with this message at 18:42 on Jan 27, 2012 |
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Jan 27, 2012 16:59
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substitute posted:Speaking of maxing your Roth as soon as possible. Is it a bad idea to max your 401k as soon as possible? I understand missing out on dollar-cost-averaging, and possibly being penalized by your plan for maxing too soon in the year. But my plan at work allows up to 50% of salary (paid monthly) in contributions, with the company's match for the year paid at the start of the next year. And that is a 2% per dollar match up to 6% of salary. 2% per dollar? As in you contribute $10,000 they match with 200? What a lovely match 
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Jan 27, 2012 18:28
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Yeah, my wife is only a teller at BB&T and she gets a 100% p dollar up to 6% of her income.
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Jan 27, 2012 18:48
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Can someone please give me the skinny on a 401K? I (stupidly) only started looking into this recently (I just turned 40.) My wife's company offers a 401K, and contributes 50% of her contributions, up to 6%. This part I understand. Now for the parts I'm fuzzy on: Should I contribute pre-tax or post-tax? I do not anticipate being in a higher tax bracket when we retire, so I'm guessing pre-tax? Also, there are 20 funds to choose from in the plan - should I go aggressive, since I'm coming in late, take the more moderate road (like Vanguard), or just do a low-earning, but stable fund? Looking at the past 5 years performance, the Vanguard, MetWest and Wells Fargo funds seem to be the best (at just over 7.5%) but other funds show something called "ITD" and the percentage is varied - I'm guessing this the performance to date from the inception of the fund?
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Jan 27, 2012 20:11
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If it's really a 401(k), then you don't get to choose pre-tax or post-tax: you will make your contributions (or rather, your wife will) pre-tax (but when you retire you will pay taxes on it as you withdraw it). She should absolutely be putting in 6% of her salary to get the maximum matching because that is free money. Put this money into the lowest-cost fund available, cost being defined as the management fee. Probably this will be an index fund which is ideal. After doing that, you should open a Roth IRA at Vanguard. That's post-tax contributions (which when you retire you will withdraw tax-free). You should be maximizing your annual contributions to that (for you and your wife) and putting them into funds which, combined with your wife's 401(k), build the right asset allocation for you, which is determined based on not only your ages, but also when you want to retire, what your personal circumstances are, and how much risk you can tolerate. Once you have maxed your Roth contributions for the year, if you can still afford to put away more money, go back to the wife's 401(k) and start pushing that up towards the max. Again, pick the lowest-cost funds you can, and use your Roth to balance. I am saying Vanguard because they offer very low cost options across the board for asset allocation. If you have the money to max both your annual Roth and your wife's 401(k), and can still put more away, then you are looking at non-tax-advantaged investing, so basically you put more money into Vanguard, but it's post-tax and will also be taxed on withdrawal. Pay no attention to the last 5 years of performance at a fund. Past performance does not promise future performance, and especially the last 5 years have been pretty atypical of the long-term market. At 40, you probably have another 25 years of investing and savings to do; you can almost guarantee that performance of funds over the next 25 years will be different to how things performed over the last 5. What you want to pay attention to instead is how much the fund managers are charging you to manage the fund. For example if the managament fee is 1%, that means they're taking 1% of your total investment out every year. If the investment appreciates in value by 4%, then they're taking a quarter of your earnings every year. The higher the fee, the more they have to beat the market in order for their management to be worth it; after accounting for fees, a majority of actively-managed funds fail to beat the S&P 500, meaning, the human beings are doing worse than just letting a computer track a reasonably broad market index. Vanguard funds are recommended by this thread because their management fees are very, very low. For a vanguard index fund you are looking at like .1% or so, or even less. So that's like ten times better than a fund that costs 1% each year. I bet if you look at the funds in your wife's 401(k), you'll find several with management fees approaching 2%: these are sucker's bets you should avoid like the plague. Leperflesh fucked around with this message at 20:28 on Jan 27, 2012 |
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Jan 27, 2012 20:19
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Leperflesh posted:If it's really a 401(k), then you don't get to choose pre-tax or post-tax: you will make your contributions (or rather, your wife will) pre-tax (but when you retire you will pay taxes on it as you withdraw it). She should absolutely be putting in 6% of her salary to get the maximum matching because that is free money. quote:You may save from 1%—50% of your eligible wages, in 1% increments, on either a before-tax or after-tax basis, or a combination of both—not to exceed 50% total and subject to the annual maximum IRS contribution limit. But at any rate, the lowest cost Index Fund offered is the SSgA S&P 500 Index Fund at 0.15% - does that sound like a good rate? Also, if I choose, I can sign up for the ING Advisor, which is 0.5% of my account balance, annually - should I participate in this plan?
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Jan 27, 2012 20:37
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Leperflesh posted:If it's really a 401(k), then you don't get to choose pre-tax or post-tax: you will make your contributions (or rather, your wife will) pre-tax (but when you retire you will pay taxes on it as you withdraw it). She should absolutely be putting in 6% of her salary to get the maximum matching because that is free money. berzerkmonkey posted:But at any rate, the lowest cost Index Fund offered is the SSgA S&P 500 Index Fund at 0.15% - does that sound like a good rate?
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Jan 27, 2012 20:40
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gvibes posted:That is a good rate. Though you really should start by looking at a desired asset allocation. EDIT: Oh, so are you talking about allocating the money toward different types of funds? Like a mix of, say, a 500 fund, an Emerging Markets Fund, and International Fund, etc? If this is what you're getting at, how should I break things up? berzerkmonkey fucked around with this message at 20:59 on Jan 27, 2012 |
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Jan 27, 2012 20:47
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Chin Strap posted:2% per dollar? As in you contribute $10,000 they match with 200? What a lovely match Sorry I typed that wrong. I meant $.20 per dollar, so 20% up to 6% of salary. It was only 10% but they upped it last year I believe. I'm still waiting for the matching contribution for 2010 to deposit this month or quarter. We really miss out on dollar-cost-averaging the match.
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Jan 27, 2012 20:51
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gvibes posted:No, it's not bad. Here's a related question that my wife and I are dealing with now that I haven't seen discussed: Does anyone know how employer matches generally function if you cap out your contribution before receiving your last pay check? For example, let's say your employer provides matching contributions at a 3% rate, and you defer enough of your income to reach the 17.5k cap in November, but then receive two more paychecks in December without any additional salary deferral (since the IRS won't allow you to put anything else in the 401k for the year). The employer should still contribute the 3% per paycheck for December even though you don't make any contributions for those paychecks, right?
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Jan 27, 2012 21:05
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NJ Deac posted:Does anyone know how employer matches generally function if you cap out your contribution before receiving your last pay check? For example, let's say your employer provides matching contributions at a 3% rate, and you defer enough of your income to reach the 17.5k cap in November, but then receive two more paychecks in December without any additional salary deferral (since the IRS won't allow you to put anything else in the 401k for the year). The employer should still contribute the 3% per paycheck for December even though you don't make any contributions for those paychecks, right? Depends on employer. Mine would not make the payments, but if you were still employed come Dec 31 would make a single true-up contribution as though you had evenly contributed. You need to call your HR department.
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Jan 27, 2012 21:07
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NJ Deac posted:Here's a related question that my wife and I are dealing with now that I haven't seen discussed:
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Jan 27, 2012 21:08
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Yes every company is different. Mine matches immediately and you don't lose it if you leave the company later in the year, so I max out ASAP every year.
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Jan 27, 2012 21:09
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berzerkmonkey posted:Ok, but what does this mean? Remember, I'm a newbie at this stuff. Though, starting with the S&P 500 is probably a good idea in the short term.
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Jan 27, 2012 21:10
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NJ Deac, everyone else answered your question, but just FYI the limit for your 401(k) is 17k, not 17.5 if you're under 50. Just in case it messes up your calculations.
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Jan 27, 2012 21:18
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Inept posted:NJ Deac, everyone else answered your question, but just FYI the limit for your 401(k) is 17k, not 17.5 if you're under 50. Just in case it messes up your calculations. Thanks - I know I read 17.5k somewhere, but based on some quick Googling, it looks like one website got it wrong originally and a bunch of others copied them. Based on the latest IRS publications you're right about it being 17k for 2012.
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Jan 27, 2012 21:26
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gvibes posted:Correct. To start, I would probably just think about splitting things between something like domestic, international, and bonds. Maybe 50/30/20 or something like that. You would then look at your available funds and see what you would be able to do. Next question: I had asked previously about investing vs. savings (emergency fund.) Does building a savings preclude investing in a 401K? I understand that the employer contribution is free money, but there is a risk of loss with investments. I guess I am asking if I should invest the maximum 6% pre-tax into the 401K and put what I can into savings, or just concentrate on savings for the time being until I build something up. Am I better off risking the money in a 401K and taking longer to build up my savings or banking on the guarantee of a savings account? EDIT: And if I do get the option of per- or post-tax contributions, which is better? berzerkmonkey fucked around with this message at 21:39 on Jan 27, 2012 |
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Jan 27, 2012 21:29
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berzerkmonkey posted:OK, cool. Thanks. Contributing up to your employer match in your 401k should always be a top priority. For example, if your employer matches 50% of your contributions, then that is an immediate 50% return-on-investment for those contributions. Even with a 401k with abysmal expense ratios and the bottom falling out of the stock market, you're still going to beat just about any other use of that money just based on the original 50% ROI alone. Besides, you're not "risking" that money in your 401k because you're not going to be touching it until retirement anyway. If it drops 20% in the next 3 months who cares? It's not like you're going to spend it any time soon anyway. If you're so crazily risk-adverse that you can't bear to chance having it lose some value, then most 401ks offer some kind of cash equivalent that probably isn't going to gain any money, but also probably won't lose anything - at least then you still get the 50% immediate return offered by the match. If you are unable to save a little bit of cash (around 1-2k) and contribute up to the employer match, then you need to reevaluate your spending habits. Once you have contributed to the match and have a bare minimum emergency fund, then the best course of action depends upon your individual situation. You want to be building your emergency fund, paying down your debt, and contributing to an IRA, but the order in which you do those things is going to vary on a number of factors. One nice thing about a Roth IRA is that it can function as a temporary emergency fund while also funding your retirement. However, if you're saddled with high interest debt, then it may make more sense to pay that off first before you start building your emergency fund and IRA.
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Jan 27, 2012 21:43
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