No match 401K vs Roth IRA

vindikation · #1 09-18-2005, 05:50 PM

I am 35 and my company doesn't match my 401k. Should I still deposit money into my 401k or should I use this "would be 401k money" in something else like a ROTH IRA? I wouldn't put in more than $4k a year from my 401k anyway, so maybe a ROTH IRA is better?

Thanks

Sniper · #2 09-18-2005, 07:20 PM

You should consider the possibility that you could put more money into the pre-tax 401K.

squiffy · #3 09-18-2005, 11:41 PM

A number of points. I will raise only 1 here for now. And post further replies later.

One difference would be the 401K deposit would reduce your taxable income in the year you make the deposit. Say your salary is 54K. BUt you elect to put 4K in the 401K. That year you are only taxed on 50K of income.

BUt I think the money then grows tax deferred, but is taxed at as income upon withdrawal. And the withdrawal terms may be different for 401ks and IRAs. We can easily look that up.

With the ROTH IRA you have more freedom to choose what investment vehicle you will use. You can go to any broker or bank that offers IRA custodianship and investments. WIth the 401K you are limited to the custodian selected by your employer.

With the Roth IRA, you will be taxed on 54K of income. SO the 4 K is taxed to you when you earn it.

You then deposit the 4,000 (after taxes) and it grows tax free until you withdraw, at which time all withdrawals are tax free.

You would have to do the math, but I would think that for most people tax free earnings and tax free withdrawal will put you ahead in the end. Though I am not sure.

If your account grows to $1 million dollars over 30 years and you can withdraw it all tax free, that would seem to be a good deal.

squiffy · #4 09-18-2005, 11:55 PM

Here is a basic blurb on 401Ks from fool

http://www.fool.com/money/401k/401k.htm?source=LN

squiffy · #5 09-18-2005, 11:59 PM

This supposedly discusses IRAs, including how to decide between Roth and Traditional, which raises the same save on taxes now or save on taxes upon withdrawal trade off that I presume you face with the 401K vs. ROTH Ira decision.

http://www.fool.com/ira/ira.htm?source=LN

squiffy · #6 09-19-2005, 12:02 AM

Wow. There are some withdrawal terms with the ROTH IRA that seem to make it more attractive. If you have no matching in your 401K, then I would think the Roth is better. BUt I haven't really done the math.

http://www.fool.com/money/allaboutir...boutiras03.htm

StickyWicket · #7 09-19-2005, 09:42 PM

Good points, squiffy...

As a note, by putting savings into BOTH (which you are allowed) the 401k and Roth IRA (should you meet the income qualifications for a ROTH---you can find these on Fool or MSN Money, you can up your retirement savings for the year to the max, which is $4k for those under 55 years of age and $14k in the 401k, equaling $18k for the year. Even if you don't meet the qualifications for a Roth, you can invest in a traditional IRA, just check with your tax advisor on deductability of those contributions.

Your contributions to the 401k reduce your taxable income for the year, as they are pre-tax contributions. They grow tax-deferred until you begin withdrawls after retirement, at which time you are taxed at your current income tax rate.

Your contributions to the Roth are after-tax contributions, so they grow tax FREE until you begin taking withdrawls after 59 1/2.

As I don't know your financial situation or your tax bracket, I cannot in good conscience make any recommendations, but I cannot personally see any downside to maximizing your retirement savings when the investment vehicles are made available to you.

One additonal point of consideration, if you change employers, you can roll-over the balance of your 401k to your new employer's plan, and hopefully THEY will offer a match and you will receive the benefits of compounding by already having a balance to transfer into your new plan!

Boo-yah...

Sticky [img]/images/graemlins/heart.gif[/img]

vindikation · #8 09-20-2005, 05:22 PM

Great links and information guys, much appreciated!

Jeffage · #9 09-20-2005, 11:46 PM

I'm in a similar situation in that my job offers a no-match 401k and a pension. With my poker income, I figure it makes sense to invest as much as possible now while I'm single and can easily do it. So, I'm 25 and putting 400 a paycheck in (will be 500 next quarter). It's about a $4000 tax savings and will be well worth it in the end. I also think this will be the first year I do the Roth IRA. I have a Merryl Lynch guy...do I just call him and tell him to set this up for me an invest in what he thinks or how would you go about it?

Jeff