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After a divorce and some stumbling around, I am trying to put my finances in order and I decided to ask for advice here.

I am 42, making 30K/year. As I posted on another forum, I am thinking about getting a college degree, so right now I can put aside a rather pathetic sum of $300 monthly. By the way, my employer doesn't match my contibutions for 401k plan. This is what I have right now:

PERS: 10K
401K plan with T.Rowe funds: 10K
Roth IRA with Vanguard VTSMX: 7K
Taxable Vanguard account: VIGRX, VFINX, VTSMX: 15K
Emergency fund with EmigrantDirect: 20K

Currently contributing:
PERS: $200/mo
401k: $300/mo

Should I keep contributing to 401k or put money into Roth IRA instead? I think I will be in lower tax bracket when retirement comes, so perhaps Roth IRA isn't such a good idea?

I have been reading Fool forums for a several days, great place to get educated!If anyone has any advice/suggestion for a new Fool, it will be greatly appreciated. Thanks in advance.
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I stuck some numbers to your question and it is a break even unless your tax rates change. (i.e. Congress changes your tax rates or you move to a state with different income tax rates). But I am 100% convinced tax rates will go up.

Key to all this calculations are these items:

#1 Your current average tax rate (I choose 12.3% -- see http://www.smartmoney.com/tax/filing/index.cfm?story=taxbracket for a calculator. I figured your taxable income at $27K)
#2 How long until you retire -- I figured 20 years.
#3 How much return you will gain in say an index fund. For these calculations I said 10%

Results -- If you take $1,000 of pretax money and stick it in a 401K for 20 years at 10%, you will have $6,727 -- Taxes will reduce that to about $5,900 if you took it out all at once in 2025. Now if that same $1,000 of pretax income was taxed today, you would have $877 left to stick in a Roth IRA. Again earning 10% until 2025 you would have believe it or not $5,900 --

So the real question question is what do you think taxes will be like in 20 years. If you believe taxes will be lower for you in 20 years, the 401K is a better deal. If you think taxes for you will be higher in 20 years, the Roth is a better deal.

Gordon
Atlanta
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The difference between a Roth IRA and a Traditional IRA/401K is usually pretty minimal, as Gordon's numbers show. It depends on exact assumptions, but basically there's not a large difference. Therefore, it's often good to have some in each, at least that's hwo I feel.

However, here's the bigger question, are you happy with your 401K plan selection? If all they offer you are load funds or 1.5%, 2% expense ratio funds that have trailed the market because of their huge expenses, then, well, screw em. Since it's going to work out about even anyway, there is absolutely no reason to have your returns eaten up in fees, especially without a company match.

Btw, even with a company match, if fees are 'too high' by 2% (annually), it can eat up the entire company match in about 35 years. So if your 401k selections aren't good, low cost, well performing, then feel free to steer clear.

If you decide to steer clear of your 401k, you can still put some money in a traditional IRA (usually tax free) as well as a Roth, so you can still play both sides of the game. Just note that your total contribution to both combined (not to each separately) can't exceed the yearly IRA limit.
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Welcome coffeefan,

I'm a coffee fan myself :-)

Roth IRA with Vanguard VTSMX: 7K
Taxable Vanguard account: VIGRX, VFINX, VTSMX: 15K


Here's a little tip: The more tax efficient funds should be held in a taxable account, and the less tax efficient funds in a tax-deferred account (i.e. Roth). VTSMX is more tax efficient that VIGRX--The turnover of VTSMX is only 4%, while VIGRX's is 24%. If I were you, I would be holding VIGRX in the Roth, not in the taxable account.

As a previous poster suggested, check out the expense ratios and whether or not you are paying loads on the 401k funds. You should be able to find this information in the fund's prospectus. Compare that to what you are paying for the Vanguard VTSMX and VFINX funds. If the expense ratios of the 401k funds are much above 1, they are considerably more expensive than Vanguards. And if you are paying loads, you might forget contributing to the 401k entirely, and contribute to the Roth instead.

Currently contributing:
PERS: $200/mo
401k: $300/mo


I've never seen this acronym before, "PERS", what is it?

2old

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I've never seen this acronym before, "PERS", what is it?

Public Employees Retirement System???

Marcusfan
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"I've never seen this acronym before, "PERS", what is it?"

Hi 2old,

The way I usually see it used => Public Employees' Retirement System

Regards, Ken
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Even if he pays 2%, he's still making 100k% on up to 7% of his salary in the 491k. That's pretty tough to beat. Hal
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Even if he pays 2%, he's still making 100k% on up to 7% of his salary in the 491k. That's pretty tough to beat. Hal

He's paying 2% every year.

He gets the benefit once.

If he puts in 7% of his salary or less, so he gets the match on all of the salary he puts away, and if we assume he could get the same investments for a 0.5% fee elsewhere, the match gets eaten away by the higher fees in 138 years.

But you really ought to run the calculation on the webpage for your particular situation.
http://www.retireearlyhomepage.com/401ksft.html
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Yes, it is Public Emploee Retirement System :)

Regarding 401k, these funds are available in our plan:

T. Rowe Price Balanced
T. Rowe Price Blue Chip Growth
T. Rowe Price Equity Income
T. Rowe Price Mid Cap Value
T. Rowe Price New Horizons
T. Rowe Price Science & Technology
T. Rowe Price Small Cap Stock
Oakmark International Fund
Columbia Acorn Select

T. Rowe Price Retirement Income
T. Rowe Price Retirement 2010, 2020, 2030, 2040.

I wish Vanguard funds were available, well, I can always go with Roth IRA.



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Thanks for advice on Vanguard funds, 2old4bs.
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The difference between a Roth IRA and a Traditional IRA/401K is usually pretty minimal, as Gordon's numbers show.

There is one difference which does not show up in the calculators.

There is talk, but little action, on moving to a national sales tax. If this happens (a long shot, but not zero probability) I will guarantee that you will have to pay the sales tax when you spend money you have taken out of a Roth. And, you have already paid income taxes on it before you put it in.

At least with a 401(k) or an IRA the money you put in is untaxed, so changes in the tax code do not schnitzle you.
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>> There is talk, but little action, on moving to a national sales tax. If this happens (a long shot, but not zero probability) I will guarantee that you will have to pay the sales tax when you spend money you have taken out of a Roth. And, you have already paid income taxes on it before you put it in.

At least with a 401(k) or an IRA the money you put in is untaxed, so changes in the tax code do not schnitzle you.
<<

This, to me, is the best reason to "hedge your bets" and use a little of everything -- Roth IRAs, conventional IRAs/401Ks and taxable investment accounts. Whatever happens, your chances of getting maximally screwed are reduced.

#29
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At least with a 401(k) or an IRA the money you put in is untaxed, so changes in the tax code do not schnitzle you. <<

Who says that Congress won't raise taxes so that you're in a higher tax bracket when you withdraw as opposed to a lower one. Whose to say that Congress won't enact a special tax on tax-deferred accounts, as a means of fairness for the folks that never bothered to invest in them. There's no way to know which way the screw job is going to go in the years to come, other than to know that the screw job is going to go somewhere.
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-The difference between a Roth IRA and a Traditional IRA/401K is usually pretty minimal, as Gordon's numbers show.

--There is one difference which does not show up in the calculators.


One difference that doesn't show up on the calculators is that the TIRA has an annual minimum required distribution starting when you're 70 and 1/2, but a Roth doesn't. So with a Roth you can be more in control of the timing of your income.

--SirTas
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There's no way to know which way the screw job is going to go in the years to come, other than to know that the screw job is going to go somewhere.

Words to live by...........
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