Over at Bogelheads we read the following discussion:
by Jetkid03 »
Mon Jan 13, 2014 6:50 pm
Hello everyone,
I am a 23 year old who has been working for a bit over a year, with ~$60K base salary and ~$10K bonus. My company contributes 6% of my salary to the 401K regardless of what I put in there.
That being said, my friends always tell me to max out my Roth IRA as soon as I reach the 6% contribution. However, that doesn't apply to me since my company pays me 6% regardless of what I put into the 401K. So my first question is, which account (401K or Roth IRA) should I max out first?
Secondly, I am taxed at the 25% federal bracket as of today. I live a pretty conservative life (in terms of spending), and I don't plan on "making it rain" every day after I retire. Thus, I feel like I should max out my traditional 401K before doing anything with the Roths. Does that sound about right?
Thirdly, do I even need the Roth IRA account at all? Since my pay is pretty low right now, I can barely meet the $17,500 minimum for the 401K. Having a maxed out $5,500 Roth IRA AND a half maxed 401K seems like a lot of hassle. Would it make more sense to just re-route the contributions from the IRA to the 401K (all traditional)?
To recap my questions (the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?
Thank you ALL!
Post edit thoughts:
1. I plan on buying a house in 3-5 years. From what I know, Roth IRA lets you withdraw up to $10K in EARNINGS for first time house buyers, whereas Traditional IRA allows you to withdraw up to $10K in PRINCIPLE. Would this mean Traditional IRA is a better option than Traditional 401K? Should i be contributing to both Roth and Traditional IRAs instead of 401K?
2. (solved) I heard someone say "As long as those 0% and 10% tax brackets exist, the 401/403/etc should come first. Just 'prime the pump' with some super minor Roth contributions if you need to age your account to that magic 5+ year marker. Put $100 in and forget." - What do they mean "prime the pump" and what is the "5+ year market" benefit? - Answer: 5 years after making your first investment in Roth IRA, you can withdraw up to $10,000 for home buying.
I am a 23 year old who has been working for a bit over a year, with ~$60K base salary and ~$10K bonus. My company contributes 6% of my salary to the 401K regardless of what I put in there.
That being said, my friends always tell me to max out my Roth IRA as soon as I reach the 6% contribution. However, that doesn't apply to me since my company pays me 6% regardless of what I put into the 401K. So my first question is, which account (401K or Roth IRA) should I max out first?
Secondly, I am taxed at the 25% federal bracket as of today. I live a pretty conservative life (in terms of spending), and I don't plan on "making it rain" every day after I retire. Thus, I feel like I should max out my traditional 401K before doing anything with the Roths. Does that sound about right?
Thirdly, do I even need the Roth IRA account at all? Since my pay is pretty low right now, I can barely meet the $17,500 minimum for the 401K. Having a maxed out $5,500 Roth IRA AND a half maxed 401K seems like a lot of hassle. Would it make more sense to just re-route the contributions from the IRA to the 401K (all traditional)?
To recap my questions (the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?
Thank you ALL!
Post edit thoughts:
1. I plan on buying a house in 3-5 years. From what I know, Roth IRA lets you withdraw up to $10K in EARNINGS for first time house buyers, whereas Traditional IRA allows you to withdraw up to $10K in PRINCIPLE. Would this mean Traditional IRA is a better option than Traditional 401K? Should i be contributing to both Roth and Traditional IRAs instead of 401K?
2. (solved) I heard someone say "As long as those 0% and 10% tax brackets exist, the 401/403/etc should come first. Just 'prime the pump' with some super minor Roth contributions if you need to age your account to that magic 5+ year marker. Put $100 in and forget." - What do they mean "prime the pump" and what is the "5+ year market" benefit? - Answer: 5 years after making your first investment in Roth IRA, you can withdraw up to $10,000 for home buying.
Last edited by Jetkid03 on
Mon Jan 13, 2014 7:21 pm, edited 4 times in total.
by Ice-9 »
Mon Jan 13, 2014 6:56 pm
If you like the fund selection in your 401k (for a Boglehead,
that would mean reasonably priced index funds representing the asset classes in
which you'd like to invest), then go ahead and invest there as much as you can
first.
If you're unhappy with the fund selection in your 401k, you can solve the problem by investing in your IRA first, where, for example, if you chose Vanguard as your custodian, you have all of Vanguard to pick from.
If you're unhappy with the fund selection in your 401k, you can solve the problem by investing in your IRA first, where, for example, if you chose Vanguard as your custodian, you have all of Vanguard to pick from.
by Kitkat76 »
Mon Jan 13, 2014 7:09 pm
Congrats on getting started at an early age. Since your Company
contributes 6% to your 401k without regard to what you contribute, a
traditional IRA would be preferable to contributions to your 401k simply
because you have more investment options. Of course ideally it would be best to
fully contribute to your 401k as it would reduce your taxable income. Then
fully contribute to either a traditional or roth ira. I would prefer a roth
since you are in a relatively low tax bracket now while your future tax rate is
an unknown.
by JW Nearly
Retired » Mon Jan 13, 2014 7:23 pm
Jetkid03 wrote:To recap my questions
(the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?
Depends on what your wild guess of your tax bracket in retirement might be compared to your tax bracket now. If you end up with a "huge" 401k the required distributions (RMD/MRD) are "huge" by law. You are getting a great early start on saving so you might accumulate more than you think. Many folks hedge their estimates and try to have some of both pre-tax and Roth accounts.
Also depends on the selections and expenses available in your 401k. Can you post the funds that are available (including ERs)?
JW
Retired Summer 2013
by Jetkid03 »
Mon Jan 13, 2014 7:26 pm
JW Nearly Retired wrote:
Jetkid03 wrote:To recap my questions
(the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?
Depends on what your wild guess of your tax bracket in retirement might be compared to your tax bracket now. If you end up with a "huge" 401k the required distributions (RMD/MRD) are "huge" by law. You are getting a great early start on saving so you might accumulate more than you think. Many folks hedge their estimates and try to have some of both pre-tax and Roth accounts.
Also depends on the selections and expenses available in your 401k. Can you post the funds that are available (including ERs)?
JW
Here are my available funds in my 401K:
And thanks to the help from other Bogleheads in this forums, here is my
allocation plan:
by curmudgeon »
Mon Jan 13, 2014 10:51 pm
Having diversity in retirement fund forms is helpful, as it
gives you choices in retirement that you might not otherwise have. Some of your
existing choices might be taken from you in the future with tax law changes as
well, though that's hard to predict. Even if the law stays the same, you may
find that salary increases bump you into the zone where you can no longer
directly contribute to Roth (and things like the "backdoor" may go
away).
There's no good predictions this far ahead, but if I were in your shoes, I'd hedge my bets by splitting between Roth and 401K. I'd probably lean more towards Roth since you are early in your career.
There's no good predictions this far ahead, but if I were in your shoes, I'd hedge my bets by splitting between Roth and 401K. I'd probably lean more towards Roth since you are early in your career.
by MichaelM24 »
Mon Jan 13, 2014 11:04 pm
Your 401k is wonderful and you have a relatively low income
right now.
I wouldn't contribute to the Roth until you have maxed out the 401k.
If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.
I wouldn't contribute to the Roth until you have maxed out the 401k.
If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.
by JW Nearly
Retired » Tue Jan 14, 2014 12:01 am
MichaelM24 wrote:Your 401k is wonderful
and you have a relatively low income right now.
I wouldn't contribute to the Roth until you have maxed out the 401k.
If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.
I wouldn't contribute to the Roth until you have maxed out the 401k.
If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.
+1
Agree.
JW
Retired Summer 2013
by Jetkid03 »
Tue Jan 14, 2014 1:06 am
MichaelM24 wrote:Your 401k is wonderful
and you have a relatively low income right now.
I wouldn't contribute to the Roth until you have maxed out the 401k.
If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.
I wouldn't contribute to the Roth until you have maxed out the 401k.
If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.
How would I be able to get my marginal tax rate down to 15%? Even if I max out my 401K at $17,500, wouldn't that leave me with over $40K gross income?
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