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Author: willinmpls Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25223  
Subject: 401k w/out employer matching vs Roth IRA Date: 2/14/2008 5:02 PM
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Hi all,

I've been lurking and trying to learn about what I should do with my money for a while, and have to thank everyone here for making this such a great and informative site! I know that questions like this one have been asked and answered before, but I'm still not sure what I should do.

Basically, I'm trying to figure out whether I should be putting money in my 401k or Roth IRA (or both).

About me: 24 year old college grad, single, no house, making a bit under 30k/year.

My employer offers a 401k plan w/ limited matching (50% of my contribution up to 5%). However, I'm fairly certain that I have to be an active employee on Dec 31 of the match year to get the matching. While I like my job, ideally I will have a different job by next december and therefore not get the matching. Realistically it's hard to predict the future so I'd say maybe 50% chance I'm still an employee then.

So, what would you all recommend I do? As I'm writing this out I'm thinking that I should put 5% into the 401k so I have the possibility of getting the matching. After that I'd only have about 3% more to put towards retirement, which could go to either 401k or Roth IRA.

Thanks in advance,

Will (whose brain is hurting from trying to figure this stuff out!)
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Author: pauleckler 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: 23034 of 25223
Subject: Re: 401k w/out employer matching vs Roth IRA Date: 2/14/2008 8:05 PM
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Welcome willinmpls. We're glad you could join us. Welcome to the board.

Note that employers match is considered free extra income by most. But there is often a vesting period for employers match. If you leave before the vesting period, they take back the match. But it does not cost you anything other than the match. So if in doubt, go ahead to go for the 401K.

After the match most people would go for the Roth first if you qualify (income below about $100K), because you hope your investments will do well over the coming years, and double at least four times. Tax free distributions in retirement are very attractive.

But note that pretax 401K, deductible IRA, and Roth IRA are mathematically identical when the tax rate now is the same as in retirement and returns are the same on the investment choices. So its pretty much a toss up. If you are in a high tax bracket now and expect to be in a low one later, pretax 401K can be attractive, but for most Roth is best if you qualify.

But by the way, working on being able to max both of them is a good idea. So set that as a goal and work toward it even if it is not within your budget now.

Good luck.

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Author: johnubc1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23039 of 25223
Subject: Re: 401k w/out employer matching vs Roth IRA Date: 2/15/2008 11:20 AM
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contribute to your 401k, at least up to the company match (free money).

contribute to your Roth, until you max that out.

contribute additional (if any) funds to the 401k.


You may end up working at the company longer than you currently plan, and it would be a shame to loose out on the match. The Roth allows tax free withdrawals in the future - and give you flexibility on your investment choices.

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