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I am in my 30s and make 120k/ yr (gross). I decided not to open a 401k account because there was no employer match.
However, I am not sure if it was the right choice. I honestly didn't really know anything about any 401k, ira or anything like that. I thought I could just deposit into my saving account for retirement.
I plan to open a traditional IRA (5k/yr) since my income doesn't qualify for a roth ira, from what I have researched. Still, it doesn't seem to be enough for the retirement plan. So, I am reconsidering if I should start a 401 k plan.
I could make the maximum contribution or less, thinking 8-10 %.
Or, should I just forget about the 401k and keep saving into my saving account?
Some says that the 401k is not as reliable as before due to the current economy. I am that financially savvy as you can tell.
What do you think? Should I 401k or not?
If you think I should, A) Traditional 401k or Roth 401k.
B) How much % to contribute?
Thank you.
Last edited by TXTXTX; 09-03-2012 at 05:50 AM..
Reason: adding
You can Roll your (aftertax traditional IRA ) into a Roth, You will only need to pay the tax on any gains in the traditional IRA. (Few cents if you roll it with in a few day or weeks of funding it). You are limited to 5K (6k>50yo).
If you company offers a Roth401K, Even with out the match, it will allow more money to be put in over the 5K. BUT, look at the funds you have to put your money into and there expense cost. In a self-directed IRA/ROTH you can select just about anything or any company/Fund to invest with. Seem a new trend that might be happening is companies that dont have match to offer 401K with mutal funds/company that have very high expense costs.
Put at least 10% into the 401k. You are doing this to save on paying income tax each year. It reduces your income that counts toward federal taxes. If you make $120k/yr and put $10k into 401k. Uncle Sam only counts you as making $110/k year.
Also, you can move around between funds and earn interest and capital gains and dont have to report this on your taxes if in a 401K or IRA. Because it is all taxed when you take it out, when you are over 59.5 years old.
If you change employers, you can move that 401k money into a rollover IRA with no tax due. Then you can set up a brokerage acct and you can trade stocks. because it's a IRA, no taxes due on your trades.
The assumption is you will take out money from the IRA and 401K when you are retired. The assumption is you will be earning less income. Thus will be in a lower tax bracket. However, Romney wants to raise the tax rates for lower income folks. This is going to scr.ew retirees that are taking money out of their IRAs.
Here is a huge issue...money in 401ks and IRAs is sheltered from lawsuits. If someone sues you, they can go after money in your non IRA but they cannot touch money in your retirement accounts.
1. You should have a mix of taxable and non-taxable retirement accounts. IRA's are funded with post-tax dollars so there won't be taxes when you withdrawal during retirement. 401k's are funded with pre-tax dollars and WILL be taxes (at the going rates in the year 2065 or whenever) when you take withdrawals in retirement. Of course, we don't know what will happen with taxes in the future but they will likely increase so it's a good hedge to build both types of retirement accounts.
2. As pp said, your 401k contributions are tax-free and lower your taxable income. This will be important as your income grows or if you get married and your household income doubles (or more). Plus, it's a bigger chunk to invest up-front and grow than your net income for IRA (although you should do that, too!)
3. Retirement income should NEVER be in a cash savings account as it has no chance to grow there (very little interest, no dividends, no stocks or bonds increasing in value). You are late to start investing for retirement (someone your age and your income should at least have $60-120k in retirement accounts) but it's never TOO late to start! I am also in my early 30's and of similar individual income (not household).
4. Research the investment options. I have made the most money by using a blend of 1) a large cap US fund, 2) a few hand-picked stocks I've very carefully researched, and 3) a blended fund for my expected retirement date (it rebalances your stocks & bonds to an appropriate risk factor based on your anticipated retirement year.) I think in 2010 I had a 15% ROI, last year if was like 10% and this year I'm at about 7% YTD. I had completely made up my losses from 2008-2009 in 2010. Many young people are terrified to watch the stock market drop 500+ points a day over and over again but they don't realize that if they had just kept investing that whole time, they were buying stocks really cheaply AND the market bounced back within 18 months. If you got out of the stock market and went with cash, you missed out on what will probably be one of the biggest wealth generating periods of your lifetime.
Yes, the OP should either 401K or IRA, regardless of employer participation. Contribute as much as you are legally eligible if current life circumstances allow. Do not assume any SS contributions you may have made will be there for you at retirement and approach you retirement savings/investments as though you will be entirely on your own in providing for yourself and your family.
So, I should have started retirement plans sooner..
After reading your posts and numerous financial adivces' articles, I feel like I get an idea, but at the same time, more confused. Well, I know for sure that I have to start a 401k AND IRA as well.
So, first, I know I will open a traditional IRA and max (5k) into it.
Second, my company offers both traditional 401k and roth 401k.
From what I understood, with my income, traditional 401k is a lot more beneficial than the roth 401k, right?
So I am thinking I put 10% (12k) pretax/Trad. 401k and maybe2-3 % into the after-tax/Roth 401k, which will be additional 3k. But, is it necessary to have after-tax 401k as well? Hm....
Third, for the investment options, the company offers an option of automatic selection based on target age. Do you think it's safe to let the company handle the investment part for now? until I do more research and feel comfortable to do it on my own?
Although I learned that I might be behind on my retirement plans, I am so gald I posted here. I really appreciate your advice. : )
Depending on how you feel about future Taxes, you can roll the IRA into a Roth (1 biz day) after you open it so all the gain in it will be tax free.
Company 401K / Roth401K comes down to how you feel future tax rates will be. The max limit you can put in changes from year to year, and you might be in the highly compensated employee catogory, that can restict how much you can put in.
Target Age funds generaly have higher expense ratios, ( there is a extra layer of management fee to manage the age fund, That then puts your money in other funds.
1. You should have a mix of taxable and non-taxable retirement accounts. IRA's are funded with post-tax dollars so there won't be taxes when you withdrawal during retirement. 401k's are funded with pre-tax dollars and WILL be taxes (at the going rates in the year 2065 or whenever) when you take withdrawals in retirement. Of course, we don't know what will happen with taxes in the future but they will likely increase so it's a good hedge to build both types of retirement accounts.
Not quite -- Roth IRA's are funded with post tax dollars -- traditional IRAs are funded from post tax dollars that ACT like pre-tax dollars -- if you qualify for a traditional tax deductible IRA. So a traditional IRA will reduce your income level, just like a 401K.
Which also means a traditional IRA will be taxed like a 401K, when you start taking distrubutions.
However -- an IRA has limits on the amount you can put in. I think it's 5K a year until you are 50, and then it's 6K. Your 401K you can specify a percentage of your income, up to 15%, I believe. (Been a while since I had a 401K -- strictly a SEP-IRA girl now) So if you earn more you can shove away more in a 401K rather than a IRA.
And in a lot of cases you can do both, in fact all three, with tax advantages.
Depending on how you feel about future Taxes, you can roll the IRA into a Roth (1 biz day) after you open it so all the gain in it will be tax free.
Company 401K / Roth401K comes down to how you feel future tax rates will be. The max limit you can put in changes from year to year, and you might be in the highly compensated employee catogory, that can restict how much you can put in.
Target Age funds generaly have higher expense ratios, ( there is a extra layer of management fee to manage the age fund, That then puts your money in other funds.
Target funds can be a terrible way to dollar cost in.
Over time you are buying less and less shares as markets rise at the same time the funds cutting back on equities because of age.
That can you leave you with a portfolio thats far more conservative then you thought you were getting.
The older you get the worse they may perform. Since they are allocated by age and not whats going on in the world you can be burned big time.
Those target funds are loading up retirees in bonds right at the bottom of the cycle.
When rates rise these folks will freak to see their funds fall by 8-10% for every point rates rise.
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