IRA or 401(k)?

Question

Im young (23) and have a low salary right now but I want to start saving now. My employer offers a 401(k) with no matching. Does it make sense for me to open and begin contributing to a Roth IRA instead of enrolling in the 401(k) or will i lose money this way? I dont plan to work for this employer for more than about another year. Thank you in advance! ;)

Answer 1

You can always contribute to your 401k, $4,000/yr, but this isn't advisable considering your age & low income, especially because your employer is not offering a match. If your serious about planning for your retirement your better off funding a Roth IRA or even a traditional IRA.

A traditional IRA is funded with pre-tax dollars, but when start withdrawing from this vehicle during retirement the funds are treated as ordinary income, in other words the money coming out of this account will be taxed at whatever the tax rate will be in 42 years from now.

A Roth IRA may be a better option, since you are young, and have your higher earning income years in your future, and will hopefully have an employer offer you a matched 401k, it may be in your best interest to set up a Roth now. A Roth IRA is a tax free vehicle in the sense that it is funded with after tax dollars, and there are no RMD's (required minimum distributions).

However as you get older and it would be in your best interest to talk with a financial planner about all the different types of investment vehicles that are available, as there are three types (tax free, tax deferred, and taxable as long term capital gains which is 15%). A good adviser will explain to you all the vehicles that fall into these three categories, such as muni's which is another tax free vehicle.

Just remember, that at retirement you don't want to have all your money in a tax deferred (401k) vehicle because you will be paying too much in taxes. Taxes are your #1 expense during retirement, not health care costs, food is actually #2, and then welfare.

Answer 2

As any good financial planner would tell you, it depends. If you believe your income tax rate will be higher when you retire (or when you're 59 1/2 and you draw from your IRA) then it is right now, either because you'll be making more money or because our government will raise taxes, then the Roth IRA is the way to go.

Of course, there are limits to the amount you can contribute ($4,000 in 2006), so if you want to go above that amount, you'd then switch to your 401(k). This also gives you want is known as "tax diversification." When you retire, you'll have the option of taking money that is taxed (your 401(k)) or not taxed (the Roth IRA), and you can make those decisions based on the current tax environment.

Another factor to consider is how comfortable you are making investment decisions. Your 401(k) probably has 10 different mutual funds or so that you can invest in (maybe more, maybe less), whereas your Roth IRA is virtually unlimited. If you feel overwhelmed with being able to invest in anything, maybe the 401(k) is right for you.

Answer 3

The big advantage to a 401K over an IRA is usually a company match. If they don't have any match, at your age I'd go for the Roth IRA. You won't be able to deduct anything upfront, but will be able to take it out tax-free when you retire.

Congratulations on being smart enough to think that far ahead, to start saving for retirement now.

Answer 4

401k is good, because it is taken out before they tax your income. Roth IRA is taken out after tax, but it will not be taxed when you do take it out. Since you said your salary is low, I think the 401k is best. Start with the lowest amount your employer will let you.

Answer 5

your best option if you afford is contribute to 401k and put in Roth IRA with the same time
But in your case,You should put in Roth IRA becuase I assume your tax rate is 10%-15% and your cheapskate employer don't match.and another thing, you just work for this one in short-term, Why waste fill out paper work?

So go for Roth IRA. In the mean time, learn how to invest the right way. At the age of 32, I amassed 63000 in 401k,12000 in Roth,30000 in cash emergency. you should learn how to invest the right way. I can pointer to you some of the amazing website

yes, you should learn 3 things:

fundamental analysis( economic report,management,competition,... tell you what to buy

TECHNICAL ANALYSIS( CHARTS+ technical indicator) tell you what to buy

sentiment analysis (bull/bear ratio, put/call ratio) tell you how moody investor can affect your investment too

Yes you could learn invest by yourself. it is your money, you should know how to do with it. for starter check this site out.

http://www.pathtoinvesting.org/index_fla...
http://www.stockcharts.com
http://www.streettalklive.com>... university. a lot amount of information. It will serve you well
I accumulate in good amount in 401k at the young age.I could share with you. when consider invest in stock market. you should consider basic 3 things:

fundamental analysis==(economic data,finincial health, management, business model, competetion)>>what to buy

technical analysis==(chart+indicator)>> when to buy

Sentiment/schycho analysis==>>mood of investor, Contrarian point of view.
Market cycle===>> check out book Trader Almanac by jeff hirsch will give you inside stuff
When you combine 3 thing, It is one of the powerful knowledge goinh with you for the rest of your live

Answer 6

ira

Answer 7

both