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Author: AliFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: 401K, Roth IRA, & Taxes Date: 9/2/1998 2:51 AM
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Hey, Fools. Last year, when I embarked on my career, I started socking away 10% into my 401K immediately. (The first 4% of which is matched with an additional 2%). Then I opened an IRA, and rolled it into a Roth IRA conversion. (I'm young and saving for a house someday, so the Roth IRA looks good.) This year I still put away 10% into the 401K, and I just opened a new Roth.

Now, I'm thinking... tax-wise... wouldn't it have been better to MAX my tax-deductible 401K contributions to the full 18% my employer allows (up to $10K or so) before investing anywhere else?

Insight...? --AliFool
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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5288 of 76397
Subject: Re: 401K, Roth IRA, & Taxes Date: 9/2/1998 8:25 AM
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AliFool - strictly speaking, tax-wise, you may be right in maxing-out 401k deposits for retirement, however some other considerations may be considered: (1) Do you have an "emergency" fund of ready cash? (2) Do you have other short or medium range financial goals that you need to meet without borrowing from your 401k? Remember your access to 401k funds is limited (loans or hardship withdrawals might be allowed), but other investments may be more accessible. Finally, your investments within the 401k should be competitive to outside investments to warrant contributing sums well above employer match amounts... Best of luck. PP

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5292 of 76397
Subject: Re: 401K, Roth IRA, & Taxes Date: 9/2/1998 10:49 AM
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Greetings, AliFool, and welcome. You asked:

Hey, Fools. Last year, when I embarked on my career, I started socking away 10% into my 401K immediately. (The first 4% of which is matched with an additional 2%). Then I opened an IRA, and rolled it into a Roth IRA conversion. (I'm young and saving for a house someday, so the Roth IRA looks good.) This year I still put away 10% into the 401K, and I just opened a new Roth.

Now, I'm thinking... tax-wise... wouldn't it have been better to MAX my tax-deductible 401K contributions to the full 18% my employer allows (up to $10K or so) before investing anywhere else?


If you have contributed enough to your 401k to receive the maximum match offered by your employer; if you have the discipline to invest elsewhere every payday as you do when investing in your 401k; and if you increase that investment by the same percentage you receive with any pay raise, then sometimes you can do better investing outside of your 401k than you can within it. You must evaluate the 401k against the alternatives on a tax-equivalent basis. I suggest one way to do that in Step 4 of my 13 Steps to Foolish Retirement Planning which you can find and read at http://www.fool.com/Retirement/Retirement.htm . Take a look at that missive and see how it works for you.

Regards…..Pixy


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Author: AliFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5299 of 76397
Subject: Re: 401K, Roth IRA, & Taxes Date: 9/2/1998 2:17 PM
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Thanks for the advice. What I am really wondering is... is it foolish ("small 'f' foolish") to NOT put 18% (instead of 10%) in -- when I could avoid paying taxes on 8% more of my income?

Thanks again... --AliFool

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5300 of 76397
Subject: Re: 401K, Roth IRA, & Taxes Date: 9/2/1998 2:34 PM
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>> Thanks for the advice. What I am really wondering is... is it foolish ("small 'f' foolish") to NOT put 18% (instead of 10%) in -- when I could avoid paying taxes on 8% more of my income? <<

Not necessarily.

You do have other needs than your retirement.

While it's certainly small-f foolish to save less than you're capable of saving, that doesn't mean that every last dime of what you save should go into tax-deferred accounts with long time horizons.

You're likely to have other needs in your life before retirement, for which you'll need to save: an emergency reserve (i.e. a few months' after-tax salary in a liquid and safe account), saving for down payments on a home, a car, potentially a college fund for little ones someday, perhaps for early retirement (before you can get to the retirement savings penalty- ad annuity-free), tha kind of thing...

Analyze your retirement situation. Invest that portion aggressively, especially if you're decades from retirement. If you'll have a really nice amount in there, assuming 10% (conservatively), I'd personally start looking to save elsewhere, perhaps "tax-efficient" portfolios in taxable accounts.

I was in the same position as you. I now put 8% in salary into my 401K, and since I started with 12% when I was 22 and have put in 8-10% in the entire decade since, I don't think my retirement accounts need fattening. I decided instead to start building a taxable account which I could use between the ages of 50 and 55 to allow me to retire at 50.

Your own needs and goals have to answer the question. But remember that retirement funds essentially "lock up" the money for a long time, so be sure you've saved enough in accessible accounts as well.

Tim

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5329 of 76397
Subject: Re: 401K, Roth IRA, & Taxes Date: 9/3/1998 10:56 PM
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Hey, Fools. Last year, when I embarked on my career, I started socking
away 10% into my 401K immediately. (The first 4% of which is matched
with an additional 2%). Then I opened an IRA, and rolled it into a Roth
IRA conversion. (I'm young and saving for a house someday, so the Roth
IRA looks good.) This year I still put away 10% into the 401K, and I just
opened a new Roth.

Now, I'm thinking... tax-wise... wouldn't it have been better to MAX my
tax-deductible 401K contributions to the full 18% my employer allows (up
to $10K or so) before investing anywhere else?

Insight...? --AliFool


Invest in the 401k so that you get the full match. Then go to the Roth IRA. Any extra money goes back to the 401k. Be sure your short term and emergency funds are covered before you max out the 401k.

The reason to put money in the Roth is that the earnings are never taxed, but the 401k will be taxed when you retire.

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