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Author: duggg Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 726144  
Subject: Re: ira (roth, traditional), 401(k), index ???? Date: 3/28/2001 11:05 PM
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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.
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