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Author: JamesBrown Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 59646  
Subject: 401K vs Roth IRA Date: 12/3/2013 12:23 AM
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I'm asking the group here to make sure I'm not missing something in a blind spot or something.

At my second job, I'm contributing 10% of my pay into the 401K. The company matches dollar-for-dollar, but only up to 4% of what I kick in. The other 6% is just gravy. I'm nowhere near the $5500 annual maximum contribution or whatever the latest figure is. I'm happy with the investment choices on offer there--a variety of low-cost index funds.

On the other hand, I've got a Roth IRA that I put money into when I get a little extra here and there, and I manage that fund myself, buying stocks of companies that grow dividends.

Should I be channeling that extra 6% into my Roth IRA instead of the 401K? Is there any tax advantage? Or is this a six-of-one-half-dozen-of-the-other thing?

Thank you.
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Author: CountNoCount 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: 53410 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 1:28 AM
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Should I be channeling that extra 6% into my Roth IRA instead of the 401K? Is there any tax advantage? Or is this a six-of-one-half-dozen-of-the-other thing?

Thank you.


I say stick with your plan. I envy you.

Count No'Count

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Author: BretBaughn One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53412 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 9:03 AM
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I think that's mostly a matter of what your marginal tax rate is now versus what you'd expect it to be when you retire. If it's higher now, you're better off with the 401K. If the tax rate you expect at retirement is higher then you're better off with the Roth and paying the taxes up front.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53413 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 9:15 AM
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Your Roth IRA will have lower administrative costs than a 401K plan.

It depends on the investment options available insider your 401k versus a Roth.

I've seen some horrible and expensive options inside 401k plans.

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Author: HMALETTER Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53414 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 9:32 AM
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I love the ROTH option.

The more it builds, the longer you can take minim distributions from your 401K when you retire.

There are also better alternatives in the Roth you manage, so they can compliment one another. The Roth gives you tax free income later on, and there are almost always better investment options.

If you can, keep it up.

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Author: telegraph 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: 53416 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 9:40 AM
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You will probably be better off putting ONLY the amount of the match into the 401K plan.

Then, put the rest of your savings into a low cost ROTH IRA, preferably at Vanguard. Invest ONLY in index funds and be at least somewhat diversified.

If you want to play 'stock picking' , do that in a regular stock account and make sure it is only a few percent of your total assets.

The advantage to a ROTH IRA is that you can, if you need to, withdraw funds from it up to your contributions.....at some point in the future before you turn 59 1/2 without paying any taxes.

You never pay taxes on withdrawals from a ROTH IRA and it compounds tax free.

You also might want to consider that the administration at some point in the future is going to take over 401K/IRAs.....and give you 'enhanced' SS....heh heh.....just like they did in Venezuela and Argentina..... you'll get 'guaranteed income' for life....(and of course, your heirs get zip when you die - the true benefit to the government)......

So having your savings NOT in a 401K/IRA might be something to consier - or at least have a considerably portion not in IRAs/401Ks. The money grab is likely no more than 10 years out and they keep 'floating' this idea.

Seems too many folks 'invest poorly' and the government will happily guarantee you a 3% return, and you won't 'loose money in the stock market either'. Of course, your income stream will end when you die, even if it is 1 year after retirement. They get to keep all your loot then.

Think of it like a government guaranteed 'annuity' when they 'take over' the 401k/IRAs.

http://money.msn.com/retirement-plan/latest.aspx?post=8f784f...


So you see..when you retire...the government will grab all your money, give you an 'annuity' based upon your savings amount.....and then.....if you die early...keep all the money. or maybe do it before, since they will be so desperate for money.....and your benefits will accrue as they take 10% from your paycheck each month for your 'retirement'....heh heh.....


t.

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Author: JamesBrown Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53417 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 9:57 AM
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Should I be channeling that extra 6% into my Roth IRA instead of the 401K? Is there any tax advantage?

I appear to be getting a variety of answers...

CountNoCount says stick with my original plan: 10% into the 401K, whatever leftover scraps into the Roth IRA.

BretBaughn: I think that's mostly a matter of what your marginal tax rate is now versus what you'd expect it to be when you retire. If it's higher now, you're better off with the 401K. If the tax rate you expect at retirement is higher then you're better off with the Roth and paying the taxes up front.

My marginal tax rate now is 25%. Quite frankly, I have no earthly idea what my marginal tax rate will be in twenty-five years. I'm confident that my expenses will be less than now, because I don't plan to live in mortgaged houses or have much debt. But honestly, who knows what the future will bring?


buzman: Your Roth IRA will have lower administrative costs than a 401K plan. It depends on the investment options available insider your 401k versus a Roth.

My 401K's fund expenses average 0.1%--I love Vanguard's index funds.

In my Roth, the only expenses are the commissions I incur when I make a purchase, currently $7 a pop. The dividends I receive from my stocks sit in a money account (earning zero-point-almost-nothing percent) until the amount reaches a high enough figure that I feel justified to make another purchase. If I buy when I have $700 to invest, then the expense for the commission is 1%, but currently I make maybe one or two purchases per year. Naturally, if I divert more of my take-home pay into the Roth account, then I'll be able to make more purchases.

My back-of-the-envelope calculation tells me that if I divert that extra 6% into the Roth IRA I'll be able to make another one to two trades a year for the foreseeable future. Call it four trades a year, $28 annually for the next three to five years. If I continue to let that 6% flow into the 401K, the 0.1% annual expense would be less than ten bucks. On that basis alone the 401K would be the better choice, except I enjoy a little stock-picking now and then.

HMALETTER: I love the ROTH option. The more it builds, the longer you can take minim distributions from your 401K when you retire.

Could you explain that further please?

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Author: workwayless Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53418 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 10:39 AM
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I am currently re-reading 'The coming generational storm' which is co-authored by Scott Burns. Burns used to write a very good column for the Dallas News. He thinks that deferring paying taxes on income isn't a good idea. Tax rates may rise as more boomers become eligible for SS and pressure US Govt to raise revenue. Book suggests limiting 401k contributions the amount that captures employee match--any additional savings put into Roth IRA and tax-efficient mutual funds.

I believe another option would be Roth 401k if your company has that available.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53419 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 11:11 AM
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My marginal tax rate now is 25%. Quite frankly, I have no earthly idea what my marginal tax rate will be in twenty-five years. I'm confident that my expenses will be less than now, because I don't plan to live in mortgaged houses or have much debt. But honestly, who knows what the future will bring?

Yep, and that's why you are getting a variety of answers, no one knows what the future holds, so it is hard to say which strategy is better. The convention wisdom is to contribute to the 401k up to the match, and then fund the Roth IRA.

I somewhat disagree with that, and here's why: You don't know what your tax rates will be in the future. In fact you don't know what any tax rates will be in the future. But it is a reasonable assumption your tax rates will be lower in retirement than while you are working. Therefore, in my view a tax break now is more valuable than a tax break later. A tax break now is a bird in the hand, in other words. Plus you have more dollars to invest now.

Here's another thing I don't like about the conventional wisdom: It seems to be based on the premise that 401k up to the match + Roth is a sufficient amount of savings. If you want to retire early or retire comfortably you almost certainly need to save more than that.

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Author: StockGoddess Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53420 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 3:22 PM
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I somewhat disagree with that, and here's why: You don't know what your tax rates will be in the future. In fact you don't know what any tax rates will be in the future. But it is a reasonable assumption your tax rates will be lower in retirement than while you are working.

Well...

Our tax rate right now is the lowest it's been in 50 years, despite the doom and gloom of the far-right. Eventually we'll have to tackle that deficit.

My view (and it is just a view) is that both tax rates and interest rates have nowhere to go but up, as low as they are. I like the security of knowing what I'll get, regardless of what insanity future congress critters may inflict on the populice. I have money in both but see the ROTH as a hedge against tax-inflation...

But your mileage may vary.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53421 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 4:51 PM
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Here's another thing I don't like about the conventional wisdom: It seems to be based on the premise that 401k up to the match + Roth is a sufficient amount of savings. If you want to retire early or retire comfortably you almost certainly need to save more than that.

Maybe if you are the sole person earning income in the household. For a two income married couple, each one could put $17,500 into a 401k and $5500 into a Roth IRA for a total savings of $46,000. If over 50, you can contribute $23,000 into the 401k and $6500 into the Roth IRA. If both of them are over 50, their total contributions could be $59,000 annually.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53423 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 6:12 PM
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Here's another thing I don't like about the conventional wisdom: It seems to be based on the premise that 401k up to the match + Roth is a sufficient amount of savings. If you want to retire early or retire comfortably you almost certainly need to save more than that.

Maybe if you are the sole person earning income in the household. For a two income married couple, each one could put $17,500 into a 401k and $5500 into a Roth IRA for a total savings of $46,000. If over 50, you can contribute $23,000 into the 401k and $6500 into the Roth IRA. If both of them are over 50, their total contributions could be $59,000 annually.

Note that I said 401(k) up to the match + Roth will almost certainly be insufficient. The OP has a 4% match, which is fairly typical. So if he makes say, $75K, 4% of that is $3K plus the $3K match. Include the $5.5K Roth = $11.5K annual savings.

$11.5K/year contribution over say, 25 years will give you a nest egg of about $700,000. Probably more than most people will have and will keep you from eating dog food, but you'll be clipping coupons.

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Author: bmillz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53427 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 8:05 PM
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In my Roth, the only expenses are the commissions I incur when I make a purchase, currently $7 a pop. The dividends I receive from my stocks sit in a money account (earning zero-point-almost-nothing percent) until the amount reaches a high enough figure that I feel justified to make another purchase.<i/>

One thing you could look into, if you haven't already, is whether your investments can allow you to reinvest your dividends automatically. Many mutual funds do allow this, even in a retirement vehicle.

As for your original question, personally I wouldn't overly worry about it. Do whichever option you feel the most comfortable with. The important thing is investing the money for retirement. The difference between your 401k and Roth IRA is less significant.


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Author: Wessex Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53428 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 8:26 PM
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I certainly agree with BretBaughn's comment.

I do note that you mentioned $5,500 as the potential maximum for contributions to a 401(k) Plan. It may have no effect on what you can or should do, but for 2014 the maximum amount you can contribute to a 401(k) Plan is $17,500 (whether as tax-deferred contributions or as Roth 401(k) contributions). $5,500 is the maximum in 2014 for catch-up contributions to a 401(k) plan and for contributions to an IRA.

Wessex

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 53429 of 59646
Subject: Re: 401K vs Roth IRA Date: 12/3/2013 9:51 PM
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buzman: Your Roth IRA will have lower administrative costs than a 401K plan. It depends on the investment options available insider your 401k versus a Roth.

My 401K's fund expenses average 0.1%--I love Vanguard's index funds.
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Good for you and thank your boss.

I've seen hundreds of qualified plans over the last ten years and can count on one hand the ones held at Vanguard.

If the plan is not held at Vanguard you could be on the hook for administrative costs.

A lot of 401K plans offer Vanguard funds but tack on administrative and "management" fees. These fees were supposed to be disclosed but the House majority fought it.

http://www.benefitspro.com/2013/09/19/clarity-sought-on-dol-...

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