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I'm trying to plan my account investing, and would appreciate suggestions based on my situation, 33 and basically just starting.

I'm rolling my old 401k into an IRA, will FF it, and I've started a 401k with my new employer. Since I have a 401k, putting future money into the IRA doesn't save me taxes, but starting a Roth IRA is attractive because the gains are tax-free.

The new 401k company matching is small, and after putting in enough to get the matching, I'll have about $4000 more to invest. So, the next $2000/yr go into the Roth, which maximizes my IRA contributions, so that leaves me with $2000+/yr left to invest ... uhm ... help? Buying some arachnids (SPY) was one good suggestion, and now that I've done more reading, I'm looking for other suggestions before deciding. Open another FF account? Open a Rule Maker account? Am I missing other Foolish options?

Thanks for any suggestions!
Fool On!


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Seems to me the critical question is what are the investment options in your 401K and how do they perform. If you have an index fund option or good quality managed mutual fund you will be hard pressed to beat the tax advantages of maxing your 401K. But if the performance of investment options in your 401K is poor, then taxable accounts become more attractive.

If you have the same investment options taxable and 401K tax protected, 401K will always win. Only when you choose investments that out perform the 401K options does the taxable account win.

If your 401K has good options, you can beat that in a taxable account only with investment options that can yield over 30% consistently. (If your tax bracket is 28%, and index fund earns 20%, your taxable investment must earn 27.8% to be equivalent). That requires investment in go-go stocks or the right high performance sector funds like technology funds. These are high risk investments. You would want to try with only a portion of your savings.

For most of us, maxing the 401K is the way to go. Then do the taxable account with additional funds (unless you are investing for non-retirement expenses like house downpayment, education of your children, etc).
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pauleckler writes (in part):

If your 401K has good options, you can beat that in a taxable account only with investment options that can yield over 30% consistently. (If your tax bracket is 28%, and index fund earns 20%, your taxable investment must earn 27.8% to be equivalent).

I reply:

Not necessarily. Remember that taxes in the taxable account likely will be paid at the 20% capital gains rate, whereas withdrawals from the 401(k) will be taxed as ordinary income. Often, this factor makes a taxable account more advantageous than a 401(k) with no matching. But (as always) the only way to be sure is to run the numbers. --Bob
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