IRA, and retirement saving in general (IRAs, brokerage, mutual funds, cash)

[CrazyJay]

Hello,

So i just graduated from college with a masters. Found a decent paying job.

Anyway, i know i should start saving for retirement right away. My company offers a 401K which i will take advantage of.

However, here's my question.

I also plan to open up an IRA. From everything I've read, it seems like the best places for that are either Vanguard or Fidelity (mainly because they offer good low cost mutual funds). Anyway, my big question is, how in the hell do you figure out what an appropriate amount per month should you contribute to an IRA, to reach your goal?

Even bigger, how the hell do i figure out my retirement savings goal?

What are typical monthly contributions anyway? I'm clueless on this subject.

oh yea, also, how do i figure out if a roth is better for me over a regular IRA?

Thanks

[Humanoid]

oh yea, also, how do i figure out if a roth is better for me over a regular IRA?

Since your employer has a retirement plan the Roth is going to be better. The reason for this is that if you make more than 60k (actually it starts to phase out around 50k, assuming you're single) you will not be able to deduct your contributions to the traditional IRA on the other hand if you make less than 60k a Roth is better anyways since your tax rate is fairly low.

Anyway, my big question is, how in the hell do you figure out what an appropriate amount per month should you contribute to an IRA, to reach your goal?

Its a bit hard because you don't know how high inflation is going to be extra. But I think the general advice is anywhere from 10~15% of your yearly pay (assuming you start young as you are).

[CrazyJay]

i will be making more than 60k

so a traditional would be better no?

[Prinny]

My son is 23 and started his IRA when he was 17. He's been putting into his 401k since he was 17 as well and is working on his MBA while he works full time and saves his money. At 23 he has a nice nest egg as well as his normal savings plan. He doubles his car payments so that a 4 year car loan is paid off in 1 1/2 year and will be finished in a few months. Now he graduated w/ his B.S. at age 20 and started early and isn't like most young ones, but you're on the right track. I say save as much as you can and put as much as you can away. 401k is the highest interest and IRA is 2k a year if I'm not mistaken.

[CrazyJay]

what happens if you start with a roth, and then your incomes passes the income limit for a roth?

do you just have to open up an regular IRA then?

[Humanoid]

do you just have to open up an regular IRA then?

No. If your income goes above the income limit for a Roth one year you simply can't contribute to the Roth that year. Your Roth can stay open and your previous contributions will continue to grow. If you go below the limit again you can start making contributions again.

so a traditional would be better no?

Since you have an employer retirement plan and you make more than 60k a year you won't be able to deduct your contributions to the traditional so in that sense it becomes just like the Roth except that when you retire you don't pay taxes on the money you take out of the Roth were as you would on the Traditional. In that sense in your situation opening a traditional IRA would be rather stupid, you'd get no real tax benefit.

The major difference between a Traditional/Roth IRA is that the traditional gives you a tax benefit now by giving you a tax deduction for whatever you contribute while making you pay taxes when you take out the money down the road. It works much like a 401k. Where as your contributions to a Roth are not deductible, but you won't have to pay taxes on the money when you take it out. But in your case you won't get the tax deduction in either case so the Roth is the clear winner.

401k is the highest interest and IRA is 2k a year if I'm not mistaken.

Huh? 40k1 is the highest interest? For 2008 you can contribute $5,000 to an IRA.

[Submariner]

IMHO so long as you have an employer willing to make contributions into your 401k, then take advantage of it. Up to the full percentage that your employer will still kick in an amount. If you can put in 10% and your employer will kick in 1% even, that 1% is still money in addition to your salary, go for it.

IRAs are another matter. They have an annual cap. Their cap has historically raised each few years, but it is still there. And nobody can guarantee that the IRA caps will continue to raise. Anyone seriously into investing, would never stop at such a low amount of their gross.

Also consider that an IRA is tax-deferred, not tax-sheltered. And an IRA offers no tax-sheltering.

IMHO I see other investment vehicles which: do not have a cap, and which do offer tax-sheltering. therefore I do not find an IRA to seriously be such a wonderful investment vehicle.



Consider these guidelines to investing:

Only invest in vehicles which use other people's money.

Only invest in vehicles that provide tax-sheltering to themselves and to your earned income. [Investments should gain your Net Worth, and should be a part of your tax-plan to avoid taxation [not just defer taxes] ].

[LongArm]

Well, the great thing about the Roth is that GAINS are not just tax-deferred--they're TAX-FREE. You'll never pay tax on your gains. And if you're young, odds are that by the time you retire, MOST of your Roth will BE gains, not principal.

That's the big advantage the Roth has over the traditional IRA (which taxes you on principal AND gains eventually). The only way a traditional IRA can compete with a Roth (usually) is if you contribute MORE TO IT (i.e. you contribute those tax savings you get with the traditional IRA each year), and I would bet my house that most people don't do that.

If your income surpasses the limit for a Roth in a given year ($114k for singles, begins phasing out at $99k), another option would be to open a taxable account with a discount brokerage and put your money into some tax-efficient mutual funds or ETFs. You'll pay very little tax along the way, and when you finally cash out, you'll pay only the more favorable long-term capital gains tax on your profits, as opposed to paying at your normal income tax rate like you would with a traditional IRA or 401k.

BTW, I agree that you should take full advantage of any company match you may get with your 401k. That should be priority number one.

[CrazyJay]

another issue is i plan to get married fairly soon. Our combined income will be close to $150 ,000

That means that after a short time, i will not be able to contribute to a roth anymore. Wouldn't that be bad? Say we hit the limit in our mid 30s to late 20's, and i'm forced to stop contributing. What if there really isn't enough principle in there, yet i can't contribute. What would i do then?

[LongArm]

Originally Posted by CrazyJay

another issue is i plan to get married fairly soon. Our combined income will be close to $150 ,000

That means that after a short time, i will not be able to contribute to a roth anymore. Wouldn't that be bad? Say we hit the limit in our mid 30s to late 20's, and i'm forced to stop contributing. What if there really isn't enough principle in there, yet i can't contribute. What would i do then?

Like I said, you could open a taxable account and invest in tax-efficient funds/ETFs. In the meantime, put as much into the Roth as you can, and then let it grow.