401K vs Roth
My situation is a but different than most. My employer pay ~5%-6% into my 401k. I have been putting about the same into myself. I have been thinking about changing my contributions to Roth contributions to balance out the overall tax. My plan allows for it so what I am buying would be the exact same, just the kind of account it's in would be different. So I won't be starting another fund any where.(Though it wouldn't be a bad idea as my plan kind of sucks in that it uses custom state made funds rather than your usual funds available) Good plan or bad plan? I know my taxes now will go up a bit but it's not going to be a tremendous amount on my income. By the time I retire I would hope my income is a good but higher. Thoughts?
If you can swing it I would say continue with the 401k and also start depositing into a roth. My employer pays 9% and I pay 11% into a state pension fund but I also started a Roth a few years back. I don't come close to maxing it out but starting this early I plan on building up to it.
This is Arfcom. Get both!
boomhower1820,
Typically an employer will MATCH employee contributions to a 401K up to a certain percent of salary - that is a big difference from straight up contributing. That means if you don't contribute, they don't contribute. Are you talking about a Roth 401k or Roth IRA? If a Roth 401K does your employer still match?
The financially smart thing to do is contribute at a minimum up to what they will match to the 401K. From there you still need to be contributing more if you plan on having a nice retirement to maintain your lifestyle. Keep in mind that contributions to 401K are made with pre-tax (tax advantaged) dollars, contributions to a Roth (either 401K or IRA) are made with after tax dollars. The Roth will cost you more now, but not be taxable later.
Originally Posted By NickV:
boomhower1820,
Typically an employer will MATCH employee contributions to a 401K up to a certain percent of salary - that is a big difference from straight up contributing. That means if you don't contribute, they don't contribute. Are you talking about a Roth 401k or Roth IRA? If a Roth 401K does your employer still match?
The financially smart thing to do is contribute at a minimum up to what they will match to the 401K. From there you still need to be contributing more if you plan on having a nice retirement to maintain your lifestyle. Keep in mind that contributions to 401K are made with pre-tax (tax advantaged) dollars, contributions to a Roth (either 401K or IRA) are made with after tax dollars. The Roth will cost you more now, but not be taxable later.
It's not a match, it's a straight contribution. Due to my job they are required by state law to contribute to my 401k.(I think it's 5% but may be plus or minus a tiny bit). Whether I put in zero or the max what they contribute is the same as it's required by law.
Whether it's a Roth 401K or Roth IRA I don't know. I just noticed on the website when I was checking my balance one day that they offer Roth. All I know is that it's after tax contributions. What's the difference between a Roth 401K or Roth IRA. I was just thinking about the difference in taxes.
I know it's best to contribute up to the match, but since I don't have a match it makes my situation a little different with more flexibility. I can't contribute both ways.(Financially not technically) I had been doing around 6% for a total between me and my employer of 11%. I do realize that by changing to the Roth contributions my paychecks will go down a bit and my taxes up a bit but 28 years down the road when I retire I think I'll be better off having my half of the contributions in a Roth account. Plus it kind of protects me a bit from taxes as whether they go up or down I've got half in each way. I do plan on having a nice retirement and will be upping my contributions down the road but right now I am focused on buying a house. Also I will be "retiring" at 58, when my I have my 30 years in. Speaking of on top of the Roth/401k contributions I also contribute to my pension. I think it's at around a 5% rate which is part of the reason I can't contribute a whole lot more right now as I'm pushing 11% of my pay. I'm a public servant so my pay is not great, it's the retirement that is the main benefit.
I had a root canal today and am on some pain killers so I hope that made sense.
I have basically no investment knowledge but I'm trying to get up to speed. Thanks!
I'm a bit confused by this. The way most Roth 401k's work is the
employee puts money into a Roth 401k, then the employer will make a
contribution, but that contribution will go into a traditional 401k. In
Fact, I'm about 99% sure the IRS prohibits employers from making
contributions to anything but a pre-tax account (IE only Traditional
IRA). Perhaps governments can follow different rules than corporations,
I don't know.
Now, the differences between a Roth IRA and Roth 401k.
A Roth 401k is through an employer. A Roth IRA (Individual retirement account), is done on your own.
Roth IRA, you can withdraw contributions (but not interest) penalty free after 5 years.
You can contribute more to a Roth 401k, than an Roth IRA
Roth 401k doesn't have income limits
Roth 401k's have minimum required distributions. At 70.5 you must start
withdrawing money, even if you don't need it. With an IRA, you can
leave it there as long as you want.
With a Roth 401k, you must be 59.5 to make withdraws without penalty
I would assume that the auto 5% your job pays must go into a 401k, the
Roth 401k is only there for your contributions, (if you choose to make
some). If that is true, I wouldn't make contributions to your Roth
401k, if you had extra money, you could get more options at a Roth IRA.
This is only an assumption, so why not call the plan provider and ask
them.
Originally Posted By tel0004:
I'm a bit confused by this. The way most Roth 401k's work is the employee puts money into a Roth 401k, then the employer will make a contribution, but that contribution will go into a traditional 401k. In Fact, I'm about 99% sure the IRS prohibits employers from making contributions to anything but a pre-tax account (IE only Traditional IRA). Perhaps governments can follow different rules than corporations, I don't know.
Now, the differences between a Roth IRA and Roth 401k.
A Roth 401k is through an employer. A Roth IRA (Individual retirement account), is done on your own.
Roth IRA, you can withdraw contributions (but not interest) penalty free after 5 years.
You can contribute more to a Roth 401k, than an Roth IRA
Roth 401k doesn't have income limits
Roth 401k's have minimum required distributions. At 70.5 you must start withdrawing money, even if you don't need it. With an IRA, you can leave it there as long as you want.
With a Roth 401k, you must be 59.5 to make withdraws without penalty
I would assume that the auto 5% your job pays must go into a 401k, the Roth 401k is only there for your contributions, (if you choose to make some). If that is true, I wouldn't make contributions to your Roth 401k, if you had extra money, you could get more options at a Roth IRA. This is only an assumption, so why not call the plan provider and ask them.
The bolded hits it. They contribute to the regular 401k plan. I can contribute to the 401k or make Roth contributions, fund choices are the same for either. I will not come anywhere to maxing out the contributions on any of the available options. I didn't know that Roth 401k had required distributions and that I had to wait to withdrawal money. I was thinking the rules were the same as a Roth IRA but they name was just different because it was available through the employer. See, told you I didn't know jack.
Main reason I don't want to get a Roth IRA is I know dick about investing. If I went that route I would likely put it all in a Vanguard target fund and that just sounds like a horrible plan.
Like I said I do plan on leaving work at either 55 or 58. Sure I may pick up a part time gig doing something but given the typical life expectancy of someone in my line of work after retirement I plan on taking it at 58 at the latest when I am eligible for 100% of my pension. I want to enjoy the money while I am alive.
Originally Posted By boomhower1820:
Originally Posted By tel0004:
I'm a bit confused by this. The way most Roth 401k's work is the employee puts money into a Roth 401k, then the employer will make a contribution, but that contribution will go into a traditional 401k. In Fact, I'm about 99% sure the IRS prohibits employers from making contributions to anything but a pre-tax account (IE only Traditional IRA). Perhaps governments can follow different rules than corporations, I don't know.
Now, the differences between a Roth IRA and Roth 401k.
A Roth 401k is through an employer. A Roth IRA (Individual retirement account), is done on your own.
Roth IRA, you can withdraw contributions (but not interest) penalty free after 5 years.
You can contribute more to a Roth 401k, than an Roth IRA
Roth 401k doesn't have income limits
Roth 401k's have minimum required distributions. At 70.5 you must start withdrawing money, even if you don't need it. With an IRA, you can leave it there as long as you want.
With a Roth 401k, you must be 59.5 to make withdraws without penalty
I would assume that the auto 5% your job pays must go into a 401k, the Roth 401k is only there for your contributions, (if you choose to make some). If that is true, I wouldn't make contributions to your Roth 401k, if you had extra money, you could get more options at a Roth IRA. This is only an assumption, so why not call the plan provider and ask them.
The bolded hits it. They contribute to the regular 401k plan. I can contribute to the 401k or make Roth contributions, fund choices are the same for either. I will not come anywhere to maxing out the contributions on any of the available options. I didn't know that Roth 401k had required distributions and that I had to wait to withdrawal money. I was thinking the rules were the same as a Roth IRA but they name was just different because it was available through the employer. See, told you I didn't know jack.
Main reason I don't want to get a Roth IRA is I know dick about investing. If I went that route I would likely put it all in a Vanguard target fund and that just sounds like a horrible plan.
Like I said I do plan on leaving work at either 55 or 58. Sure I may pick up a part time gig doing something but given the typical life expectancy of someone in my line of work after retirement I plan on taking it at 58 at the latest when I am eligible for 100% of my pension. I want to enjoy the money while I am alive.
If you don't know anything about investing what makes you think a Vanguard target retirement fund is such a bad idea?
Vanguard target date retirement funds are actually good low expense funds. A bit on the aggressive side but I think you would be doing just fine by using one for a Roth IRA, that's exactly what I do.
Originally Posted By Slappy600cc:
Vanguard target date retirement funds are actually good low expense funds. A bit on the aggressive side but I think you would be doing just fine by using one for a Roth IRA, that's exactly what I do.
As do I. Target Retirement 2050!
I would go with the Roth IRA at Vanguard. Low expense and plenty of options. If it is after tax money and there is no match of any kind from the employer why let their financial guys charge you high fees while providing poor options?
Originally Posted By castiel:
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If you don't know anything about investing what makes you think a Vanguard target retirement fund is such a bad idea?
Just having all eggs in one basket. I'd be doing the 2040 fund. Better idea then leaving it in the work Roth?
Originally Posted By Slappy600cc:
Vanguard target date retirement funds are actually good low expense funds. A bit on the aggressive side but I think you would be doing just fine by using one for a Roth IRA, that's exactly what I do.
You might want to check the prospectus on those funds. Target date funds, and I can confirm this with Vanguard, are typically "Funds of Funds" meaning that the target date is comprised of a mix of other mutual funds rather than individual stocks and bonds.
For example, the Vanguard Target Retirement 2050 fund may report an expense ratio of 0.19% but the actual expenses you are incurring are higher because that doesn't include the expense ratios of the funds that are held within this fund.
Vanguard Target Retirement 2050 is comprised of:
1 Vanguard Total Stock Market Index Fund Investor Shares 62.9%
2 Vanguard Total International Stock Index Fund Investor Shares 27.1%
3 Vanguard Total Bond Market II Index Fund Investor Shares* 10.0%
Fortunately those funds have pretty low expense ratios themselves so you aren't getting hammered too bad but it's something you should very aware of when getting in to a target date fund.
I won't touch target date funds for that reason BUT that's not to say they aren't appropriate others. Someone feel free to correct me if my understanding is incorrect.
