ira or 401k?

Question

i am 24 want to start something small for later in life what should i do 401k or ira both are tax detectable right? but you can borrow money from the 401k right? my job does not offer a 401k though so could i get one from an online thing the fidelty or something?

also on the ira what is the differences between traditional and the roth?

Answer 1

Actually 401k is a plan that can only be offered by an employer, so at this time your choices are limited to IRA (Individual Retirement Account). It is indeed a very smart idea to start something early. You can start with just about anyone, Fidelity, Vanguard or any other. I personally prefer opening an IRA with a discount broker i.e. TDAmeritrade, Scottstrade -- does not really matter. Anyone who will not charge you an annual fee for the privilege of having an account. Anyway, I prefer investing into ETF's that mirror various indexes. Those usually have the lowest expenses for managers etc. and work really well in a long run.

Good luck.

Answer 2

The difference between a roth IRA and a traditional IRA is that you contribute after tax dollars to a Roth (no tax break in the year you contribute) and when you retire you don't have to pay any tax on the gains. A traditional IRA gives you a tax break each year you contribute but you pay income tax on the money you withdraw when you retire. Both grow tax free.

Since you're interested in being able to borrow, it may be of interest to you that with a ROTH IRA you can withdraw all of the money you contributed without any penalty or ever having to pay it back. (You must leave any gains you've made in the IRA account though) so If you contribute 4,000 and a year later you've got 5,000, you can take out $4,000 and spend it on anything you like. You can't do this with a traditional IRA.

IRAs also have an advantage over 401ks in that there is usually a wider variety of options in the kinds of investments you can make.

There are a number of variables that come into play, but generally speaking the best thing to do is contribute to the 401k first up to the amount your company matches, then contribute everything else to an IRA. In your case, you can't open one because your employer doesn't sponsor it. But don't worry, there's no real reason to open a 401k even if you could since there is no company matching involved.

Based on what I'm hearing it sounds like a Roth IRA is best for you. You don't get the tax break up front (it comes at retirement), but you'll be able to pull money out early without much hassle if you need to.

Answer 3

Oh boy...this is a large question that can go many ways. First of all, let me start by saying I am 24, soon to be 25, and about a year ago I really started to pay attention to this kind of stuff, because, as you seem to know, it is very very important. Here are some things to know:

Q1) 401(k) or IRA?

A1) Both! ...maybe.

Here's the deal, 401(k)'s are great if your company does a match on your contributions. If you say your company does not, a 401(k) can still be a good idea, since it has a large contribution limit and all taxes are deferred until retirement. Basically, what that means is that you don't pay taxes on whatever you take out now, but you do pay taxes on what you put in as well as your earnings whenever you take it out. What the further means is that, say you pay 25% taxes (or so). If you were to put $100 into your 401(k), it would only cost you $75 of your take-home pay. Another big plus of the 401(k) is that it can be automatic, if you set it up to take a percentage out of every paycheck. In addition, the limits on a 401(k) are very large...I believe they are at $15,000 this year. Also, as you stated, you can take money out of your 401(k) without penalty, but ONLY THE MONEY YOU PUT IN, not any money you have made.

Ok, IRA's. Basically the same, with a few different restrictions on when you can take your money out, but has a lower limit. These are also deductable and taxed when you take them out. There are a few other issues...um...here: http://www.sasm.com/free/401irar.htm

Q2) Roth IRA vs IRA

Now, my personal favorite for our age group is the ROTH IRA. The contribution limit this year is $4000. The roth IRA has similar rules as the normal IRA, but the contributions are not tax-deductable, because you contribute with your after-tax dollars. Then, as the money grows, it grows tax-free, and ALL MONEY at the end is taxless! The plus here is that politicall change, tax bracket change, all that, doesn't effect you. The downside is that you don't get the nice tax break. But, at our age...and i dunno about you, but...low tax bracket, I think the Roth IRA is great. I'm personally putting the maximum $ for my company match in my 401(k), then trying to max out the Roth IRA every year. Any more than that i throw in my 401(k)

You do whatever you feel is best.

here are a few good links:
http://www.myfico.com/CreditEducation/Calculators.aspx
(look at the bottom of this one for the retirement planners. Average returns of the S&P 500 index over the last 80 years has been 11.7%, so after mutual fund fees and program fees, a good estimate for returns if you use an index fund would be 10%. I use 9% for my estimations to be sure. Inflation has been 3.43%. Typical retirement age is 65, and if I were you, I wouldn't count on any Social Security, so any that you get will be a plus. And if they ask for a wage inflation rate, I go with 4%, which accounts for inflation+experience. if you don't average 4%...then get a new job! (that's my philosophy, anyway) ...uh, is that it? I think so)
http://www.nadart.org/calculators/index.cfm?id=7
http://www.fool.com/money/allaboutiras/allaboutiras.htm
http://finance.yahoo.com/expert/article/yourlife/3679
http://money.cnn.com/magazines/moneymag/401k_guide/
(a great 401(k) guide)

Ok...I think that's about it!

Answer 4

both are tax deferred not tax deductible. You will eventually pay taxes on them. Yes, you can borrow money from a 401k and not an IRA. But, since your own job doesn't offer one you're stuck with the IRA. An individual can only get a 401k if he works for himself.

The basic difference between traditional and ROTH is when you pay the taxes. Roth you pay them up front and Traditional you pay them when you take them out. With the Roth, because you paid your taxes up front, you do not owe any taxes when you take them out (even on the earnings). Traditional, because you deferred the tax upfront you will owe taxes when you take them out (even on the earnings). At first glance the Roth seems like quite the bargain. But in all actuality for anyone over the age of 35 it's really almost a wash...certainly you can take the earnings out tax free but you put less in (due to taxes) so you didn't earn as much over the investment lifetime. Also, typically by age 35 you've reached your maximum tax bracket. So thought is to defer the tax until you get to a lower bracket.

Personally? Due to your age,I think you should hit the ROTH for about 8-10 years then switch over to the traditional and start putting money into that while the Roth sits and grows and grows. That way you have both that earn at a reasonable rate and you can pick and choose which to take from. Diversity in money types is as important as diversity in investments.

Answer 5

In certain circumstances you can borrow from a 401, but you have to pay it back.

You can take from a ROTH whatever you put into it (but not the interest/dividends earned) after a certain time frame, which I can't remember.

You can set up your own traditional IRA through Fidelity, Vanguard or any other brokerage firm. I do believe you can even set one up at many banks.

401 and traditional IRA are taxed at withdrawal and ROTH is taxed now but no taxes when withdraw money.

Seeing as your employer has no 401, you could start a traditional IRA and deduct some or all of it on your taxes.

You can contribute a $4000 max between traditional and ROTH IRAs per year, subject to change at the govt's whim.

Answer 6

401k is only through employers. Traditional IRA can earn interest without taxation. You pay taxes at retirement when you pull out proceeds.

Roth IRAs are taxed now, but you do not have to pay taxes later on. Also, you can borrow from a Roth to buy your first home.

Answer 7

My 401k has done much better over the years than my IRA's. There is a risk with the 401k that you do not have with the IRA's. You cannot borrow from either type. I would check with a local investment broker rather than trying something on line.