Did I get sound Financial Advice?

[SendTrash]

Talked with a financial advisor recently and bought into the advice that a roth IRA is better than my current company's 401K plan.

Basically the points were the following:

1) A roth IRA is not taxed when you get the money out
2) Although the money into an IRA is untaxed going in, you will lose more when you are taxed taking the money out
3) My company's IRA plan isn't worth investing in because there is no matching funds

I was only putting in $250 a month into my company's IRA, that is $3000.. the max contribution for a roth IRA, so I really didn't change my current budget, plus I have been saving for less than a year.. so I figure the change wasn't that dramatic

Did I get sound financial advice? How are you guys (who are working) saving for retirement?

If I got good advice, then I will continue talking to find out mutual funds to invest and such.

 

[KLin]

It seems to me that points 1 and 2 contradict each other. isn't an IRA just a tax shelter, and when you take the money out when you retire, you'll pay taxes on them? The taxes when you're older will be less than what you would pay now anyways. I put 8% of my income into a 401k, with 3% being matched by my employer. I've been putting into it for close to 2.5 years now.

 

[mugs]

Originally posted by: KLin
It seems to me that points 1 and 2 contradict each other. isn't an IRA just a tax shelter, and when you take the money out when you retire, you'll pay taxes on them? The taxes when you're older will be less than what you would pay now anyways. I put 8% of my income into a 401k, with 3% being matched by my employer. I've been putting into it for close to 2.5 years now.

With a traditional IRA you put pre-tax money in and you're taxed when you take it out. With a Roth IRA you put after-tax money in and you're not taxed when you take it out.

I think the max contribution this year is $4000

 

[KLin]

Originally posted by: mugs

Originally posted by: KLin
It seems to me that points 1 and 2 contradict each other. isn't an IRA just a tax shelter, and when you take the money out when you retire, you'll pay taxes on them? The taxes when you're older will be less than what you would pay now anyways. I put 8% of my income into a 401k, with 3% being matched by my employer. I've been putting into it for close to 2.5 years now.

With a traditional IRA you put pre-tax money in and you're taxed when you take it out. With a Roth IRA you put after-tax money in and you're not taxed when you take it out.

well that cleared it up. Thanks :thumbsup:

 

[DBL]

I think the general rule for those who are still relatively young is that you should invest in your companies IRA until you no longer benefit from their matching funds. Then start maxing out your Roth. After that is maxed, go back and increase the pct in your companies IRA. If you get no matching funds, start w/ a Roth IRA nd put into your companies IRA after you have maxed out your ROTH.

For instance, right now, I contribute 6% to my companies IRA. Any more and I don't gain any additional benefit from my companies matching program. So, I then contribute 3k to my Roth.

 

[CPA]

#2 is not accurate, as noone knows what the tax rates will be at in the year you retire, nor do you know which tax bracket you will be in. But, nonetheless, salesmen use it as a marketing tool to scare you out of it.

#3 is irrelevent since you don't get matching funds in a Roth IRA, either.

 

[Double Trouble]

Nobody can tell you which one is 'better'. Basically, different investment and/or savings vehicles have pro's and con's. Your personal situation and goals determine what the best one is for you -- your tax bracket, your ability to save, need to access funds in an emergency, your age, your retirement plans etc etc.

With regard to the points you listed: 1. True, but that's only because you've already paid taxes up front - roth ira contributions are after-tax. Therefore, if you are currently in a higher tax bracket than you anticipate being in when you retire, the roth IRA may not be the best option. 2. See #1 - if you are in a lower tax bracket later on when you start with drawing funds, then a 'regular' IRA could be better. 3. Matching funds are one reason to use the company 401(k), but there are others. For one, there might be fees associated with setting up and managing your own ira plan, whereas the 401(k) is provided by your employer. Another important distinction is that 401(k) plan savings are protected from creditors (in case of lawsuits or other financial problems), while ira funds are not.

Anyhow, usually the roth ira is a better deal than simple ira for most people, but that depends on your situation. If your company offers a 401(k) plan and you're happy with it's performance, then that's not a bad option, even if the company doesn't match contributions.

 

[CPA]

Originally posted by: DBL
I think the general rule for those who are still relatively young is that you should invest in your companies IRA until you no longer benefit from their matching funds. Then start maxing out your Roth. After that is maxed, go back and increase the pct in your companies IRA. If you get no matching funds, start w/ a Roth IRA nd put into your companies IRA after you have maxed out your ROTH.

For instance, right now, I contribute 6% to my companies IRA. Any more and I don't gain any additional benefit from my companies matching program. So, I then contribute 3k to my Roth.

I'm going to assume that you mean 401K, not IRA. They are technically two different investment vehicles.

 

[Hector13]

Just to clear things up... are you comparing a roth IRA to a traditional IRA or to your company's 401K (which has no matching?). You seem to refer to both or either.

 

[DBL]

Originally posted by: CPA

I'm going to assume that you mean 401K, not IRA. They are technically two different investment vehicles.

Yep. Sorry about that and thanks for clearing that up.

 

[mjquilly]

roth > non-matching 401k
matching 401k > roth

 

[SendTrash]

Originally posted by: tagej
Another important distinction is that 401(k) plan savings are protected from creditors (in case of lawsuits or other financial problems), while ira funds are not.

Wow.. that is an important note... Well, besides retirement, do you guys also invest in mutual funds... like how do you save for the short term to buy the new car or in the longer term, the new house?

 

[Corsairpro]

i thought choosing between Roth and IRA is purely for saving on taxes....

For an IRA (pre-tax) you want to put in when you're in high tax brackets and take out when you retire to a lower tax bracket.

Roth (post-tax) can be used if you maxed other plans or are already in a low bracket and may go into a higher one by the time you retire (b/c of lots of investment income for example?)

Is my general understanding pretty accurate?

 

[rufruf44]

I much rather take advantage of 401K pre-tax deduction and then enlist someone smart to get the $$$ out with the less tax possible, rather than have the $$$ tax first before going to ROTH IRA, coupled with the possibility of congress might tax it again in the future. Already there's rumbling about that in congress. I think Dephard initiate something that will replace roth with something taxable.

 

[nitsuj3580]

Well I'm in gov't so we have our version of the 401k in our Thrifts Savings Plan.

When I went to a financial advisor they recommended for basic investing purposes (if you can do it)

1) Companies 401k or TSP (put in as much as they match)

2) Roth IRA (put it post-taxed money but when you take it out, it's does not get taxed)

3) Bank account where you can get to money quickly

Just something to compare the advice you got with.

 

[DaveSimmons]

Originally posted by: rufruf44
I much rather take advantage of 401K pre-tax deduction and then enlist someone smart to get the $$$ out with the less tax possible, rather than have the $$$ tax first before going to ROTH IRA, coupled with the possibility of congress might tax it again in the future. Already there's rumbling about that in congress. I think Dephard initiate something that will replace roth with something taxable.

If they do kill Roth IRA, which is unlikely given how popular it is, your existing Roth contributions will still grow tax-free.

Another advantage of a Roth IRA is that you can open it at www.vanguard.com and put the money into their VFINX S & P 500 index mutual fund, which is a much better investment than most funds offered in 401(k) funds.

But for most young people, the rule of thumb is:
1. Invest in 401(k) up to the % that employer matches
2. Then fund a Roth IRA
3. Then if you can afford to, put even more into the 401(k) since you still get the tax savings

 

[Double Trouble]

Originally posted by: SendTrash
Well, besides retirement, do you guys also invest in mutual funds... like how do you save for the short term to buy the new car or in the longer term, the new house?

Depending on the 401(k) plan, you can borrow from your own 401(k) savings and pay yourself interest while repaying the loan. There's a bunch of stipulations etc, but it can be a good way to have savings available.

Other than the ira's, 401(k)'s etc, I generally have the investments spread over various mutual funds, bond funds, some spdr's, and guaranteed funds. You can always set aside a smaller amount that you can 'dabble' with and invest in individual stocks. Make sure that whatever you 'dabble' with is $$ that you can afford to lose.

 

[Goth]

Normally, I hear this advice, with certain conditions:

1) Contribute to your 401K up to the limit at which your company matches. If they match 50% up to 8% contribution, you put in 8% (if financially able).
2) Contribute to your Roth ($3K limit this year, goes to $4K next year)
3) Any left over amount, add to your 401K as it reduces your taxable amount.
4) Any left over after hitting the 401K limit ($13K this year), invest in stocks/funds in a privately managed (taxable) account.

#1 works if your company provides good funds from which you get to choose. Also, make sure the company covers any yearly fees to the 401K plan. Some plans cost 1+% per year for "maintenance" and most companies cover this. If not, you're losing 1% of your investment. If #1 provides good choices w/o charging the employee any fees, use the above four steps. If not, start with step #2 and decide if #3 is more worthwhile than #4.

 

[Goth]

Originally posted by: DaveSimmons
If they do kill Roth IRA, which is unlikely given how popular it is, your existing Roth contributions will still grow tax-free.

Well, it will grow tax free unless Congress decides to change the laws in the future and make them taxable upon withdrawal -- not likely, but possible.

 

[DaveSimmons]

Originally posted by: Goth

Originally posted by: DaveSimmons
If they do kill Roth IRA, which is unlikely given how popular it is, your existing Roth contributions will still grow tax-free.

Well, it will grow tax free unless Congress decides to change the laws in the future and make them taxable upon withdrawal -- not likely, but possible.

Extemely unlikely, almost as unlikely as the govenrment just seizing it all to fund Social Security. Anyone in congress who voted for such retroactive taxation it would likely lose their seat, and any president who didn't veto it wouldn't get a second term.

 

[rahvin]

Originally posted by: DaveSimmons

Originally posted by: Goth

Originally posted by: DaveSimmons
If they do kill Roth IRA, which is unlikely given how popular it is, your existing Roth contributions will still grow tax-free.

Well, it will grow tax free unless Congress decides to change the laws in the future and make them taxable upon withdrawal -- not likely, but possible.

Extemely unlikely, almost as unlikely as the govenrment just seizing it all to fund Social Security. Anyone in congress who voted for such retroactive taxation it would likely lose their seat, and any president who didn't veto it wouldn't get a second term.

I would say better chances of being hit by lightening, the AARP would be all over any attempt to pass legislation like that.

 

[SendTrash]

Originally posted by: tagej

Originally posted by: SendTrash
Well, besides retirement, do you guys also invest in mutual funds... like how do you save for the short term to buy the new car or in the longer term, the new house?

Depending on the 401(k) plan, you can borrow from your own 401(k) savings and pay yourself interest while repaying the loan. There's a bunch of stipulations etc, but it can be a good way to have savings available.

Other than the ira's, 401(k)'s etc, I generally have the investments spread over various mutual funds, bond funds, some spdr's, and guaranteed funds. You can always set aside a smaller amount that you can 'dabble' with and invest in individual stocks. Make sure that whatever you 'dabble' with is $$ that you can afford to lose.

Is that a good idea? Borrow against your retirement savings? Does it still earn money as if it were all still there?

 

[Goth]

Originally posted by: rahvin

Originally posted by: DaveSimmons

Originally posted by: Goth

Originally posted by: DaveSimmons
If they do kill Roth IRA, which is unlikely given how popular it is, your existing Roth contributions will still grow tax-free.

Well, it will grow tax free unless Congress decides to change the laws in the future and make them taxable upon withdrawal -- not likely, but possible.

Extemely unlikely, almost as unlikely as the govenrment just seizing it all to fund Social Security. Anyone in congress who voted for such retroactive taxation it would likely lose their seat, and any president who didn't veto it wouldn't get a second term.

I would say better chances of being hit by lightening, the AARP would be all over any attempt to pass legislation like that.

I totally agree, but just wanted to mention it as a possibility. Many tend to think the laws are set in stone with no chance of being changed.

 

[Double Trouble]

Originally posted by: SendTrash

Originally posted by: tagej

Originally posted by: SendTrash
Well, besides retirement, do you guys also invest in mutual funds... like how do you save for the short term to buy the new car or in the longer term, the new house?

Depending on the 401(k) plan, you can borrow from your own 401(k) savings and pay yourself interest while repaying the loan. There's a bunch of stipulations etc, but it can be a good way to have savings available.

Other than the ira's, 401(k)'s etc, I generally have the investments spread over various mutual funds, bond funds, some spdr's, and guaranteed funds. You can always set aside a smaller amount that you can 'dabble' with and invest in individual stocks. Make sure that whatever you 'dabble' with is $$ that you can afford to lose.

Is that a good idea? Borrow against your retirement savings? Does it still earn money as if it were all still there?

Yep, borrowing from your own 401(k) plan can be a very good idea, depending of course on your own situation. You basically borrow from yourself, paying yourself back the amount plus interest. So, your savings continue growing because you're paying interest on them. Instead of paying someone else interest to borrow money, you pay yourself -- it's a win-win. The only issue is that it depends on your 401(k) plan, and that there are restrictions on how you can borrow, how quickly the loan has to be repayed etc.