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My best friend who is 28 years old, single, makes 110k, and has about 46k in her 401k. She contributes 10% with a 4% company match.
She's saving (in cash) about half of her take home (about 3k saved in cash monthly) after 401k, paying mortgage, and expenses (no other debt). Emergency fund of only 6k.
should she contribute more to her 401k or keep it as is?
What would you do?
I would advise her to build up her emergency fund to one year's take home income. With the jobless rate as high as it is, this is reasonable. Once that is accomplished, I suggest she contribute the max to her 401K--which is currently $16,500 per IRS regulations--so that she can take advantage of the tax break involved in doing so. Then, build up a non-emergency, non-retirement nest egg in either investments, bonds, cd's, whatever she feels more comfortable with.
Most people need the forced disipline of the 401k.....
although the roth grows tax free it gives you the same amount at the end compared to a 401k assuming the same tax bracket. the roth works better when comparing it to a deductable ira because to get the same bang for the buck . 4,000 in a roth plus the money you prepay in taxes is really over a 5,000 dollar investment. in a deductable ira you cant put the full 5,000 in as its over the limit. let me repeat that. to put 4,000 in a roth requires over 5,000 from your income or savings so to even things up you need the same 5,000 + from income or savings to go into the 401k. YOU WILL FIND THEY LEAVE YOU AT THE END WITH THE SAME EXACT AMOUNT ASSUMING THE TAX BRACKETS ARE THE SAME..
ill use 4,000 dollars as its a nice easy number to work with:
assuming a 25% tax bracket if you start with 4000 dollars you can put
3000.00 in a roth and 1000 goes into prepayment of taxes
if your investment grows 100% you get 6,000 tax free
4000 put in a 401k grows to 8,000.00 , you have 4000 because you didnt have to prepay any taxes so you have all 4,000 working for you. at the end you have 8,000 bucks less the same 25% tax equals the same 6000.00 after taxes.
the roths can help keep your rmd's down later on so thats a good thing if you think your social security may get taxed less..
if you think taxes are headed up go roth.
if you think once the pay check stops and maybe you will be living in a low tax or no tax state at retirement and you will be in a lower bracket then when working then go 401k
roths are nicer to inheirit also.. although quite possibly your kids may be in a lower tax bracket then you were and so the 401k wins there
Last edited by mathjak107; 10-27-2009 at 02:30 PM..
absolutely they can go down..... for over 60 years government spending has been getting worse and worse. for over 30 years taxes have dropped by about 3% a year as each year the brackets are loweres to allow more and more money thru at lower taxes.. im paying the least amount of taxes for my income ever ..
i prefer to do my planning not around what if's , but around what was ,what is , and what stands a pretty good chance of being as none of us know for sure whats next.
what does make sense is the fact that there are 180 million retiring baby boomers. i dont think any political party wants to be the one to tell them by the way we are raising your income tax..
could they do it? sure but is it likley? not in my book.....
every other tax will sky rocket , inheritance taxes may sky rocket as the dead dont vote, but i think we will continue to see the rates drop by 3% a year..
even if rates stayed the same i dont know many people who will be in the same tax bracket with no pay check as they are with one... if nothing else most of us are moving from a higher tax state to a lower one. we are leaving new york city for PA .. what a drop in taxes that is for us right there.
did you know as a retiree i can pull 35,000 in retirement income and pay as little as 1500 bucks..
know what it would cost me to do a 35,000 roth conversion? about 14,000 bucks in all the taxes they would take....
think the gov't is allowing roth conversions next year for everyone regardless of maximum income because its in our favor?
I usually recommend that people get the full match from their 401 and then use a Roth to its limit and then other investment options.
susie ormann likes to say that but i already showed you why that may not be a good idea. the other reason is retirement money should be sacred.
living our financial lives is like fighting a war . we have all these different fronts going on. we need money for now, money for a house, for school, for retirement. you cant pull from one front to shore up another front..
you may win the battle but loose the war.
not only dont most people have the discipline to do their own savings on their own so they can do a roth but the roth makes it to darn easy to hit that money for other uses
Most people need the forced disipline of the 401k...............roths are nicer to inheirit also.. although quite possibly your kids may be in a lower tax bracket then you were and so the 401k wins there
......... this looks like a whole bunch of copying and pasting to me!!!
it doesn't really answer my original question though....
cheers.
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