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Hello all, I just graduated from college and plan on saving a hefty portion of my paycheck. I'm wondering if I should max out the 401k contribution (17500/yr) which comes with a 6% employer match or whether I should open a Roth IRA. In both cases, I plan on managing the money myself and invest in ETFs. I currently take home about ~4k/month after tax (if one excludes 401k contributions).
SO: Should I open a Roth IRA? If so what should be the percentage distribution between 401k/IRA/bank account if I want to put away 1000-1400 a month? Thanks for your sage advice.
Max out your Roth IRA... Every year.... 401k have high fees, choose the one with the lowest fees... Save 6 months for emergency money in your savings account...
OP, you need to analyze your current and future tax brackets. Often, a ROTH IRA is great choice for someone starting out their career. Often, it's better to select a traditional IRA. The goal with an IRA/401k is to reduce your tax liability.
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agreed~ as long as the Roth IRA is available and viable as it was advertised (the government doesn't change their programs) its the best deal going. A lot of people that actually save for retirement will tell you the amount they pay in taxes is greatest during retirement. Having a good sum of money the taxes have already been taken care of is a great thing. As long as you can possibly keep as much in your IRA to get your match you should end up golden
Hello all, I just graduated from college and plan on saving a hefty portion of my paycheck. I'm wondering if I should max out the 401k contribution (17500/yr) which comes with a 6% employer match or whether I should open a Roth IRA. In both cases, I plan on managing the money myself and invest in ETFs. I currently take home about ~4k/month after tax (if one excludes 401k contributions).
SO: Should I open a Roth IRA? If so what should be the percentage distribution between 401k/IRA/bank account if I want to put away 1000-1400 a month? Thanks for your sage advice.
I would take the 401(k) up to the level of the match. Most plans only match up to the first 5-6% of the employee's contribution. That provides an immediate return (after vesting) that will offset the fees pretty easily. You are also deferring taxes on the amount you contribute.
Then fund the Roth IRA. After that is done, complete funding the 401(k).
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Quote:
Originally Posted by jlawrence01
I would take the 401(k) up to the level of the match. Most plans only match up to the first 5-6% of the employee's contribution. That provides an immediate return (after vesting) that will offset the fees pretty easily. You are also deferring taxes on the amount you contribute.
Then fund the Roth IRA. After that is done, complete funding the 401(k).
Do this ^^^ but FIRST see if they offer a ROTH 401k, that is my preference. 401k (ROTH or regular) offer much higher contribution limits than IRA.
Always do the math when doing taxes to validate whether a ROTH or Traditional IRA is better for particular tax yr. (you can later convert your traditional to a ROTH (pay the taxes during a low tax yr)
ALSO... consider the WHOLE investment picture, as you may end up with TOO much in deferred accts. (As Mentioned ROTH contributions can be withdrawn AFTER 5 yrs (earnings must stay). That can help.
BUT get a WHOLE investment strategy. My real estate investments have contributed most to my wealth, Then equities (non-IRA / Retirement / 401k), then in 3rd place is Retirement accts. )(The Others offer FAR more flexibility).
So, be smart and find some OLD mentors. (I bought my first house at age 19... it was a dump and only 600 SF, and the toilet and shower would freeze in winter). The payments were $128.84, and represented a LARGE portion of my wages. I thought I was in TROUBLE and would starve. So far I have not starved . Multi-family rentals (senior centric) are my favorite investments at the moment. You buy a couple of those in your 20's. They are paid off in your 40's and you are getting enough positive cash flow to be retired and living in Tahiti. No JOB required... Lots of options... Bogleheads.org is good training for your investments.
So it seems like the consensus is to open a Roth IRA. It seems like maxing out the Roth IRA limit is pretty trivial so I think I'll probably go with jLawrence's approach.
My employer's 401k lets me contribute after-tax, but earnings from these contribution are taxed so I'm not sure if that's considered a Roth 401k or not.
And what's this about high 401k fees? My employer allows me to manage my own 401k thru Schwab, where I can trade their free ETFs.
My employer's 401k lets me contribute after-tax, but earnings from these contribution are taxed so I'm not sure if that's considered a Roth 401k or not.
And what's this about high 401k fees? My employer allows me to manage my own 401k thru Schwab, where I can trade their free ETFs.
Whoa, slow down.
Unless your employer SPECIFICALLY has a Roth 401(k), you do NOT have a Roth 401(k). In any plan that I have been involved in, it is quite clear.
Post-tax contributions to a 401(k) are a whole different matter. I really do not understand why you would want to go post-tax UNLESS you are doing it in a Roth 401(k).
As for the expenses and fees in a 401(k) plan, they can be pretty hefty if management does not make some effort. First, there are administrative costs related to the plan. Some employers bear the cost of the plan as a cost of doing business. Others burden the employees. Those are NOT the big fees.
More troublesome are the expense ratios of the funds that are in the plan. For our plan through Vanguard, the fees were actually pretty low, most under 0.40%. However, with the change of ownership, our plan was moved to Fidelity where many of the options are 0.60%-1.5%. I know that Fidelity has lower expense ratios available. HOWEVER, there are MINIMAL low expense options in our current plan. In six weeks, I will be off the payroll and will be transferring the 401(k) to Vanguard and E-trade (Vanguard ETFs).
StealthRabbit made a good point (one that I missed as I am 50+). As a young graduate, it is possible to tie up too much of your money in tax-preferred assets (i.e. 401(k)s and IRAs) and not enough money where you can get to it to live. make sure that you have what you need to do things like buy a home and the like.
Personally, I am impressed with anyone in their 20s who is saving money. It is key to getting ahead. Also money saved now is worth a lot more in the future.
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Stealth - I have always invested in equities over real estate. I cannot pick a home that I can make a profit on. When I sell my current home, I will be 1-2. (g)
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Lots of options... Bogleheads.org is good training for your investments.
