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Are you sure the 401K does not have any company match? Generally, if you have a 401K available, IIRC you can only do a limited amount of $ per year into a Roth.
There's 401k but no company contribution. I'm sure about this part. I'll have too look into how much I can contribute to a roth.
Can't beat the Roth IRA, because your investments grow tax free. Investing for retirement is important, but you want to make sure that you have 6-9 months emergency fund in a money market or savings account first. You are smart to be thinking about retirement at 24, the earlier you start the better.
+1
And, as evilnewbie noted, do both if possible. You may as well pay yourself rather than paying the government whenever possible.
Why are people advocating an emergency fund first? Roth IRA contributions can be deducted tax free at any time. He's better off putting most of his money in the Roth IRA and a small amount towards an emergency fund. If sh** hits the fan he can deduct from the IRA and be where he would of been without contributing.
If I had a choice between funding months 4-7 of the emergency fund or funding a Roth IRA, I'd do the Roth for sure. If it's a choice between months 0-3 of the emergency fund or the Roth, I'd do the emergency. The Roth really isn't much less liquid than an emergency fund, a little bit but not a huge difference.
A Roth is a no brainer if you are in the 15% bracket IMO. But if you end up in the 25% bracket I think the decision is much closer, but I would still opt for the Roth.
Why are people advocating an emergency fund first? Roth IRA contributions can be deducted tax free at any time. He's better off putting most of his money in the Roth IRA and a small amount towards an emergency fund. If sh** hits the fan he can deduct from the IRA and be where he would of been without contributing.
Can you deduct from the IRA without penalty? I did not know that.
Roth CONTRIBUTIONS (not gains) can be WITHDRAWN (not "deducted") at any time without tax or penalty.
Also, whether or not you contribute to a 401k has no bearing on whether you can contribute to a Roth (unless doing so reduces your income enough to put you under the income limit for a Roth).
I've never considered my retirement accounts a backup emergency fund. I've always had another account at a bank either in MM or locked in a CD. To me a retirement fund is one not touched until retirement.
I've never considered my retirement accounts a backup emergency fund. I've always had another account at a bank either in MM or locked in a CD. To me a retirement fund is one not touched until retirement.
Normally I'd agree, but 5,000 in a Roth @ 24 is worth ~108,600 when he's 64, assuming 8% return. If you assume 9% return it's ~157,000. He would be absolved of paying between 20-30k in capital gains tax, assuming a 20% rate when he retires. That to me is worth a little risk in having a slightly less large emergency fund to get that kind of tax savings. I mean worst case is he just has to withdraw his 5,000. It's not like it's earning any interest sitting in most savings accounts.
Normally I'd agree, but 5,000 in a Roth @ 24 is worth ~108,600 when he's 64, assuming 8% return. If you assume 9% return it's ~157,000. He would be absolved of paying between 20-30k in capital gains tax, assuming a 20% rate when he retires. That to me is worth a little risk in having a slightly less large emergency fund to get that kind of tax savings. I mean worst case is he just has to withdraw his 5,000. It's not like it's earning any interest sitting in most savings accounts.
But once you take it out you can not put it back so it is better not to think of retirement accounts as available.
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