Roth IRA or 401k? (1 Viewer)

[Jonny Thews]

I will be starting a new job next week but my new employer will not match my 401k contributions until I have worked there for one year. Should I continue to invest in my Roth until my employer starts to match or should I contribute to the 401k immediately?

Jonny

 

[Patrick Sun]

Is the year a "vested" period? Or a simple time limit before matching (probably up to a certain percentage) your 401K contribution after the time limit has passed.

At my company, they would match 75% of my 401K contribution up to 6% (maxing out at 6% would mean a ceiling of 4.5% match by my company), but to get the company match, the employee would need to stay with the company for 5 years, otherwise the company matched amount would be forfeit if I left the company before 5 years, or they let me go before then.

Either way, max out on your Roth IRA (because the gains from that account won't be taxed upon withdrawal), and start on the 401K IRA to get into the habit of saving and putting money away automatically.

 

[Patrick_S]

I would contribute to both and I would continue to contribute to both even after your employer starts matching your 401k.

 

[Jonny Thews]

Patrick Sun:

You have to be employeed for 5 years before you are 100% vested and they also match 50% up to 5% of my salary. Also, I have been maxing out my Roth since I started investing in 2000, so I am very familiar with DCA. I definitely plan on ivesting in the 401k once they start to match but until then would it make sense to invest in the 401k?

Patrick_S:
Contributing to both this is an option but I would rather put all money into one investment vehicle than $2000 in each for example.

Jonny

 

[Jonny Thews]

Correction, the company matches 100% up to 5% of my salary.

 

[Todd Hochard]

If this is an either-or proposition, you'd be a fool not to take the 401k with company match.

I'm of the opinion that most people need the tax break more NOW, than later, so the 401k makes sense. Plus, a Roth is a little TOO easy for the average American to raid for, say, new speakers.

 

[Jonny Thews]

Todd:

I would agree with you that not taking advantage of the match would be foolish but the company doesn't start matching until one year of service.

 

[Patrick Sun]

Money saved is money saved, even if they only start matching after a year, you will have a year's worth of savings by doing it now, and having it become habit, and it'll force you to adjust your spending now so that the "cut" in pay next year won't affect you much.

 

[GordonL]

Always contribute to your 401k first because those contributions are exempt from income tax until you start making withdrawals. It's a no-brainer if your 401k contribution limit is higher than the limit for your Roth. If you have extra cash after you make your 401k contributions, put that into your Roth. Or send it to me.

 

[Joe Szott]

Invest at least 5% in the 401k to get the full match, then put the rest in your Roth. Over the full term of the account, the Roth will eventually pay more money (even after the pre-tax breaks for the 401k.) Roths just tend to be better plans, more flexible in the long run.

But passing up that free 5% from the company is just stupid. It's free money, doesn't get any better than that.

 

[Eric_L]

If you are not getting the match now you still may want to consider the 401k. Or not.

What fees/costs/commissions are in your roth? What is your current tax bracket? How long do you expect to work there? What is your future tax bracket? Will you need the money for college or home? How much can you affordto save? What is your state and local tax rate? What are your investment options? Should you also be doing non-qualified saving? If so how much?

See? It gets complicated.

 

[Jonny Thews]

Thanks for the comments but as I have said already the match does not begin until after One Year of service, therefore I am not passing up the 5% match.

Eric:

My wife and I will be making $85,000 together and we are about 30-35 years away from retirement. Our portfolio consists entirely index funds such as the Vanguards Small Cap Value, S&P 500 and a Life Strategy fund which includes international stocks, domestic bonds and the Wilshire 5000 Index. As these are all index funds their expenses are all below .30. My new job will be at Fidelity Investments actually, so I will continue to be sticking to index funds.

I also read that some firms will be offering a Roth 401k but I do not know yet if Fidelity will be doing so. If they will offer it then I would definetly invest in that.

 

[paul_v]

You should be investing in more aggresive funds at your age. The general rule is 100 minus your age is the percentage at which you should be investing in high growth funds. So for a 31 year old like me my portfolio consists of 70% high yield funds (all yielding 12% or better).