ok, maybe i'm a real idiot (and actually, i know i'm not), but what i have read here about the differences between these investment vehicles (ira--roth & traditional, 401(k), and index funds) still leaves me confused.if 401(k)s are so great, why would you need/want an ira? or an index fund? if index funds are so great, why would you need/want a 401(k)? or an ira? etc, etc, etc.i read a response to a similar question that used a "box" analogy that someone else thought was really great--sorry, i still didn't get it. is there anyone out there who can explain this in virtual baby talk? it would make me a joyous one indeed. :)
joyousonetoo asks,If 401(k)s are so great, why would you need/want an ira?Not everyone works for a company that has a 401(k) plan. Also, the selection of investment choices in a 401(k) is much more limited, and it's usually harder to get money out of a 401(k) plan than an IRA. And a Roth IRA may have certain tax advantages over traditional IRAs and 401(k) plans.or an index fund? if index funds are so great, why would you need/want a 401(k)?You're making an apples and oranges comparison. You can invest in an index fund directly, or you can do it through an IRA and with many 401(k) plans.The general advantage of investing inside a 401(k) is that the funds grow tax-deferred until you retire, at which point you may in a lower tax bracket.Most 401(k) plans offer several mutual funds to choose from. If you select an index fund, there is virtually no management, because the index defines which stocks are bought and sold. Thus, the expenses on index funds are generally less than with managed funds. In a managed fund, a fund manager responds to market changes and buys and sell stocks he/she feels will produce the most gain.One would think that managed funds are worth the additional expense of being managed, but during the last few years (perhaps except 2000 and 2001), index funds outperformed most managed funds.
the answer partley depends on how much money you have availible.i would always max out the 401 1st. then if you have surplus $ ,&your gross isn't too high to prohibit it's use fund the roth with after tax $. The principal & interest won't be taxed on after 591/2 retirement withdraw.if you still have $ left, open a traditional ira $ put $2000 after tax $ /year in it. the advantage of an index fund is that minimal turnover of equities occur.this makes it tax efficient for an investment outside the tax sheltered retiremnt accounts.
then if you have surplus $ ,&your gross isn't too high to prohibit it's use fund the roth with after tax $. The principal & interest won't be taxed on after 591/2 retirement withdraw.if you still have $ left, open a traditional ira $ put $2000 after tax $ /year in it.A little correction? You can open both a Roth IRA and a regular IRA. However, that does not change the maximum that you can invest in them IRA + ROTH IRA must be <= $2000 per person. So, if you put $2000 in the Roth, you can put exactly $0 in a traditional. I didn't think you could put after tax dollars in a traditional IRA. I mostly agree with your suggestions. However, it depends on the 401k plan that your employer offers. My first rule of thumb would be to maximize the 401k up to your employer's match. They might match 1/2 of what you contribute up to the first 6% (as an example). So, you probably want to contribute at least 6% (unless you are making over $175,000.) Then I would decide based on other factors. For example, you might not have any good choices in the 401k. It is still a good idea to do the first 6% because the matching improves your return by an incredible amount. So, if you have really bad choices, I would then put money towards a Roth (assuming AGI less than 150,000.) After you put the $2000 towards the Roth (or $4k if you can do one for your husband or wife), and you can still afford to save more I'd look back at the 401k. If you have maxed out(optimized) the 401k and the Roth...and have more that you want to save, it is time to open a regular brokerage account. Index funds are often the best choice that you have in your 401k. justpatrick
If you are planning to retire early you can use a loophole that allows you to start withdrawing from your 401k early, right? You can't do that with Roth money though, can you? Isn't that a factor in determining where your retirement dollars go? Although $2000 doesn't seem like much to save.Also, don't you have to consider what your tax situation will be when you retire? The Roth money will never be taxed, while any 401k withdrawals will be taxed as regular income?Please correct me where I'm wrong everyone. These are just conclusions I came to when I looked at Roth vs 401k.Miriam
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