Open a Roth IRA or max out 401k?

[Guest Tkriger]

I am 22, been at my current job for just over a year.

I enrolled in their 401k when I started because they match 3,000 a year, I currently have about $8,000 in my 401k.

My question is, since I am so young, should I simply continue contributing the 9% I do to the 401k, which comes out to me contributing just over the 3,000 they match a year (9% x 38500 = 3465) or knock it down so I just contribute 3,000 and put the difference in a Roth IRA?

I could afford to contribute more, but should it go to the 401k or an IRA?

I am also looking for a broker/bank that will allow an IRA with no minimum, so I could perhaps just do a few hundred $ a year into it, is that possible?

[himt4]

well, since you already maxing out the match you can get in your 401(k) plan, I don't see any obvious monetary advantage to putting in the extra to the 401(k).

The advantages of putting the money in the roth IRA is that it might be less red tape. 401(k) plan's require a trustees signature to do a lot of things, the individual has more control in an IRA. Another advantage of the roth IRA is that you are always permitted to take out the principal from a roth IRA without penalty or taxation. So in a financial emergency, you could get your hands on that roth ira money.

Possible monetary advantages of the 401k plan, as you hinted at, is that the IRA might have higher fees than the 401(k) and the 401(k) might offer some great investment choices you can't get with your IRA's institution.

That's just some thoughts...you should hear others.

[Guest heike]

Roth IRA's are totally tax-free upon withdrawl, 401K payments are taxed.

I would put in up to the total that the employer matched, and than as much as possible (up to 4000.00 per year) into a Roth IRA.

[John G]

There are other issues you should consider about your 401k: If it is all company stock, then you would want to put other funds into a Roth to diversify your investments. What are the annual expenses of the 401k - zero, flat rate, or percent. Does your 401k direct you to loaded mutual funds... funds with front end fees? If you leave this employer, what are your options?

Since your additional funds are modest, you will probably have to start a Roth using the monthly automatic contribution from your checking account. Often there is no minimum starting balance and the annual fee may be waived for this systematic investment approach.

[Guest redlenses]

Some Ideas:

Contribute enough to get the full match in your 401(k) - you get an instant 50% (100% in your case it looks like) return (via the match) and a 30% return (via not paying taxes).

After that, contribute as much as possible to a Roth IRA - no instant return, but all of the growth is tax free. Meaning if your money doubles, triples, 10X all that is tax free when you take it out in retirement - the younger you are the more of an advantage this is since time = growth. In the IRA you may have much better choices on investments too.

After maxing out your Roth IRA, continue contributing to your 401(k), even though you don't get a match, you still get the instant 30% return (via not paying taxes). Additionally you lower your MAGI (modified adjusted gross income) which lets you max out your Roth IRA with a much higher income than if you didn't contribute to the 401(k).

Whenever you leave a company, rollover the 401(k) into a Traditional IRA.

If you have a number of years until you retire, and your MAGI is less than 100k and you can afford to pay taxes on the money (don't pay it / have it withheld from money in the IRA), convert that Traditional IRA into a Roth IRA (pay taxes now and let the money double, triple, etc tax free).

For Your Roth IRA - I like Scottrade because of low commissions and no maintence fee. Only catch is you have to start with $500 I believe. Good mutal fund selection and stocks trade for $7

Sharebuilder has no minimum, but does make you invest at least once a year to avoid a maintence fee. Sharebuilder does not offer mutual funds which is a negative, but they do offer ETFs. Commissions to buy are super low at sharebuilder.

[John G]

I agree with the extra going to a Roth. Hopefully you have a few thousand available to erase the account opening minimum issue with either a mutual fund or brokerage. But, if you don't, you can ask custodians about their programs that involve automatic checking account withdrawals each month. Many funds waive the annual fee and have no minimum opening balance if you start an automatic monthly program. Some of these programs often start at $100 per month auto deposit.