Message Font: Serif | Sans-Serif
No. of Recommendations: 0
401k's are pretax (mostly), but no, contributions to a Roth IRA are not. This money has already been taxed, but current tax law allows for qualified tax-free withdrawals. Whereas withdrawals from a 401k will be taxed at one's ordinary tax rate.

Let me add that at your age and income, a Roth is apetizing. Although you pay tax before your contributions ($3000 a year for next year), you are likely to pay higher taxes if you wait to start a Roth when your income is higher.

If you are just starting out, however, it may be a goal to maximize your usable income and reduce taxes in which case a pre-tax 401K or traditional IRA is advantageous.

A few other things:

1) Are you planning for yourself or a family? In the case of the former you may be considering buying a first home. In the case of the latter, you may also need to consider saving for college. With a Roth, after 5 years you can withdraw original contributions without penalty if needed (although I am not endorsing the practice). With a 401K you can take out loans but it costs you.

2) Have you fully explored Merryl Lynch? Employers are notorious for not educating their employees well on how to use a 401K, but the the host financial vendor has a wealth of information and tools on-line that you can use to research your fund options and devise a retirement investment strategy.

3) Take control over your financial destiny. Answer a few questions for yourself:

- What is your retirement goal? This is often a hard question for young people to answer but it is important to establish a goal and stick to it.

- What is your risk aversion? Young people tend to be more risk averse, especially after the last couple of years, because they have a hard time envisioning how $100 a month can grow into hundreds of thousands. Generally you want to take more risks when you have a long ways to go, and fewer risks when you are approaching retirement.

- What is your asset allocation? There are a lot of strategies out there, but a common one is to invest heavily in stocks when you have 20+ years before retirement and move towards more conservative investments as you seek to preserve you nest egg. Sub-allocation by small, medium and large cap, value and growth, as well as international should be part of your strategy.

Hope some of this helps and meets Fool approval.
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.